All:

I made an arithmetic error.

If you take in 30 billion for 40 quarters, you don't need 80 - 1.5 billion dollar deals to break even .....

you need 800

BW

You can edit articles at the top under "Comments ### - Edit."

The NYT recently wrote a print article about Tesla that was also an all time low in jornalistic integrity. It reads like a Valleywag piece, which is shameful. Media companies are suffering, but that does not mean that journalism should suffer, too. Just because sensational blogging gets traffic does not mean that venerable media publications should do it.

Shame on the New York Times. It's time to revisit your leadership.

carlwimm, please keep reading and commenting. Your experienced views are valued. When I joined The Funded shortly after it started, I expected to use the collective wisdom to navigate the VC route. What I've gotten is more balance than is available from any other source. Thanks to this community (and Adeo) I'm still self funded, bootstrapping, and growing.
Here we are on Discovering Startups: http://www.discoveringstartups.com/th...
If you are so inclined, vote for us - and if we can help you, just drop me a note via the contact page on our website. (BTW, there are VCs who use our product to inform their decisions on what teams to invest in, so I do business with them, just haven't taken their 'money with strings'.)

And this is why I am boot-strapping now.
VCs and Angels have become useless.
BTW, as soon as we switched direction, signed early customers and started showing revenue, Angels got really interested in us........
Right now my investors and I are thinking about how to generate $1M/year income stream for each of us - math works and beats the whole funding fiasco.

to post # 5 anonymous and All

You write than Angels are interested once you show real traction. It used to be that VCs were the road once you had traction and Angels are there for pre traction.

Boys, you just gotta carry the load until it is so obvious that even these guys will jump in.

Angels as well as VCs are looking to supply you with the dollar to buy the ticket when and only when you have already won the lottery.

In general, there is a road that people in innovation follow.

1) they start out poor, lean, mean and hungry.

That means they have to put up with a heaps of "reminders that a bull passed here recently" in their lives and their projects.

2) they get successful .

They resolve to give back because the pain and injustice that they endured still rankles.

So they become Angels or VCs, but with a mission to "do it right".
After all they have not forgotten their roots.

3) The comfort sets in.

The new Angel no longer has any incentive to spend 8 hours in some start up, reviewing a disorganized project, he wants to spend 15 minutes. Who needs the unneeded "bull reminders"?

So he starts to insist on "minimums" before he is interested. A minimum of model built, a minimum of sales, a maximum of debts. etc.

That frees up more time for golf.

4) All of a sudden, the same fellow who thought nothing of working 23 hour days for 100 days straight, has a pleasant life with a secretary/admin to handle the crap.

So when you come to him with the need to spend 100 days of 23 hours a day of work, just to raise the valuation of your project from 10,000 dollars to 25,000 dollars, he is not interested.

Now he lives by minimums.

5) and he starts to let his money do all the work.

the minimums you must have start to climb. 100,000 then 500,000

He joins an Angel club so that others can do the organization work and he can meet up once a month and cherry pick.

more golf.

The rest of this pathway you can figure out for yourselves.

It is all quite natural.

Let me point out the huge thing that the Angel/VC miss when they insist on minimums.

They are not there for the essential decisions. And the essential decisions are made early.

The decisions you make at the outset determine much of what will happen in your project. Character is destiny... as the Greeks say.

And they are all made without you, my "minimum loving" friends.

Minimums mean you are more of a deal taker than a deal maker.

So you develop skills in deal taking ... and lose your skill at deal making.

All those little tricks and traps on the term sheet, where you start to make your living not from the success of the project but from the other people in the project.

And pretty soon you no longer qualify as an Angel.

You have repressed the shards of whatever soul you have left and are now .... all about "the money".

You have become "VC".

The Dark Side of the Force has you firmly in its thrall. You worship the Prince of Darkness.

While still human (and clinging to the last tendrils of Angelship) , you might have had a pang of regret in entitling yourself so deeply in the accomplishments of others.

Not as VC, a demon that walks the earth.

You now thrill in defrauding LPs of their funds so that you can live well off the "2". You laugh at the widows and orphans who will get less to eat so that you may fill your engorged belly.

Daily, your heart soars as entrepreneurs kneel before you in obeisance as you dangle the promise of OPM.

Sadistically, you tremble in "the little death" each time you humiliate an entrepreneur with your term sheet.
The transition is complete.

Okay, maybe this last bit might have been a smidgen over the top.

But you get the point.

The day you rely on anything other than yourself is the day you walk down that path of outside money.

And from then on, it is always the same path for everyone, regardless of pretty the flowers or how sweet the perfume.

best wishes

Carlwimm - Excellent - both posts.

I am a lurker on this site because after my first meeting with an 'Angel' and a brush with a 'Vulture Capitalist' I realized 2 things:

1. VCs are not interested in my business [automation of container terminals] because they know nothing about industrial operations and those that do realize that there is no quick exit at huge multiples; and
2. They are all looking for the next web/software deal that requires zero business knowledge.

So I reverted to my bootstrap strategy. Until a corrupt public official took a bribe and cancelled the container terminal concession, turned around and gave it to a competitor. The developer [our client] has filed suit against the official and the Port Authority. But it is Italy so we will see what happens in 5 years.

in the interim, I am talking to industrial partners [crane builders and component suppliers] that see value in our technology. Once we have a credible group [could be a JV] we will be able to approach infrastructure investors.

My advice - listen to carlwimm.

to post 7 atsysusa

Let me commiserate on your recent Italian adventure.

The quick suggestion - try and work with equipment providers, as you care doing. Let them work the marketing channels . Also, a possible avenue are engineering and planning firms.

An automated facility would be laid out differently, if it were built form scratch, than a conventional "manual" facility. This a guess but I suspect I am right. New technology can be retro fitted but generally, a great new method enables a rebuild or a new build.

On the larger front, I hope you got patents, lots of them and extended to Italy. IF you don't, they can (and obviously will) steal it.

But if you do .... you can have some real fun.

Did you know that if you can show that some part of the transaction passed over or through the USA, you can file a claim here, under US law, US procedure and US fairness. Long live Beaumont, Texas.

I believe that the USA and Italy have reciprocal treaties so that a judgment in the US is also automatically a judgment in Italy. once a judgment has issued here, the only action of an Italian court is to help you collect.

While an Italian official may have a cousin who is on the bench in his home town, it is unlikely he wields that same influence in a US rocket circuit.

Make sure to include the port, the operator, the official, the town, the state, the new company who go the franchise and 6 guys who sell donuts on the corner outside the gate.

All you need is on of them to come to you, though his lawyer, and ask for settlement since the exposure is huge, and you can get him to turn on his buddies while you let him off. Cops and DAs do it all the time.

If you can get a US court to accept jurisdiction, the action costs 10 bucks to file and you will spend 2,000 for every 100,000 they spend during the first 2 or 3 years.

just a thot.

best wishes

Thank you, much appreciated.
Look forward to your next (potential) posting on incorporating.

Thanks for the article Rebecca. My company is already a Delaware C corp today but I'd love to hear your thoughts on why not do this since nearly everyone suggests this (and that VCs won't invest in LLCs). Scott

Thanks for the bit about Delaware Rebecca. I am a startup lawyer and always recommend ca. It speaks poorly of my profession that so many recommend Delaware. It tell clients that it is more expensive and only better if you are public. Since something like 90% of vc exits are mergers and a lot of these cos will never get VC funding. The chance that they will benefit from being a de Corp is small. They can reincorporate in DE if they get that far.

Thanks, nice article. In regards to:

> Once you take venture money, you are signed up for a growth path that leads to a liquidity event (sale or IPO) in the next 5 to 7 years.

Should this really read something like:

Once you take venture money, you are signed up for a growth path that may (a) lead to a big liquidity event (sale or IPO) in the next 5 to 7 years (< 5% [?] likely hood), or (b) cause your company to crash and burn (like the majority of VC backed companies)?

You should incorporate as a S corp and stay that way until you're profitable. That way, all the loses flow to the shareholders. Once you become profitable, or get an investment, you should convert to a C corp.

Delware doesn't buy you much over CA if you're based in CA unless you're a public company.

I agree with the poster. Since the VC model is clearly "broken" (or whatever you wish to call it), then look for dollars elsewhere. The bottom line is achieving business success and VC funding is one small(er) component of that in 2010 and beyond.

I have written on this topic before, but some things are worth repeating. Private equity (angels, "f&f", PE firms, etc.) is the way to go right now because the VCs have made themselves largely irrelevant.

I have made a number of posts on this topic so I won't repeat them here. If there's enough demand, someone please let me know the best forum and I will repost a collection of my previous posts regarding "how to get private equity funding" .

I saw this coming (with the help of lots of people).
The good news for start-ups is that boot-strapping is a real strategy now. Outsourced labor, virtual offices, free (low cost) collaboration tools and access to markets/resources through networks make it very possible to launch a tech company. In fact, I am able to do a "day job" successfully while pushing revenue for my company. Yes, I have very long days and weekends are none existent, but with nominal funding from me and a Friends&Family round, I feel really confident about the long term success.
And the best news, I keep a majority interest in the company, we are focused on break-even, which is where long term success comes from.
Final thought, a recent news article about Tech Coast Angels (southern California) investment in a company highlighted that we need to be at revenue (and break even is on the horizon) before seeking bigger funds.
There is your new model: start in the garage, beg your friends, pinch every penny, find customers as early and often as possible.

Dr Steve - I'm interested in reading your posts. Please put up links.

#2 - Bootstrapping works for companies that are software only. Anything with hardware costs too much. And we still need innovation in things that we can hold.

Carl -

You write - "Time for the new model to emerge"

The current model includes Supply (startups) and Demand (Partners/ Corp/VC/Angel)

But, it does not address the broken Channel of Distribution.

As you point out perfectly - "The truth is that the VC world has been, for the longest time, a Valley centric but nationwide collection of VCs arranged in a circle engaged in mutual "self excitation". You can figure out the short phrase for this, yourself."

The current channel of distribution is closed, localized, inefficient and abusive.

Adding more supply through mentoring organizations such as The Founders Institute and Y Combinator and Tech Stars may create more worthwhile Supply. But, it does nothing to address a new model for a Channel of Dsitribution.

Here is a demo of the new model of Dsitribution - a Global Marketplace for Partners, Funders, Early Stage Companies and those that support the.

www.earlystagemarketplace.com

Thank you,

Elliott Dahan

@#3 - Here's a link to a previous post that covers that issue:

http://www.thefunded.com/funds/item/7...%3A+TheFunded+%28TheFunded.com%29

Hope that it helps.

to post 6 Elliot

nice to hear from you again, hope all is well.

May I ask, just exactly what you mean by "Distribution". Are you talking about marketing channels for technology and products or something else?

best wishes

Carl -

Distribution = the methods of matching Sellers (early stage companies) with Buyers (Partners/Funders). The classic example would be a consumer product that distributes through direct sales to large accounts, distributors to small/medium accounts or OEM/Private label.

In the Early Stge world the product from Sellers = technology, entrepteneurs and startups in various stages of maturity; the Buyers are VCs, Corporations and Government.

The VC model is broken - we all know that. But, the solution to helping fix the model Early Stage growth is not to bitch and moan about rude VCs or lack of VC $$.

Check out the ESM demo - let me know what you think ?

I am looking for as many viewpoints/opinions/comments as I can.

Thanks,

Elliott

to post 8 Elliot

Tks for the definition. I understand your question.

I don't have good news for you, in do far as a "mechanism" goes .... I don't believe you can have one.

The very idea of a "mechanism" ... as in a transmission, for example, assumes two things that are static - the input and the output. If the input is the same (power from the engine) and the output is the same (torque to the drive shaft), you can build a transmission.

But in start ups, the input and outputs are not static. They are changing all the time. Like the saying, "you can never step in the same river twice" .

The entrepreneurial input:

Changing technology, changing channels of distribution, changing customer, changing sources of unavailable funds .... etc. etc.

Nothing about an entrepreneur's situation is the same from day to day and nothing is required to be the same from day to day, except one thing .... the ability of the entrepreneur to "do the impossible with the unavailable".

The bootstrap ability of the entrepreneur needs to good enough, every day, to surmount the unsurmountable.

The finance "output".

Actually, this is more like two anchoring points of a bridge than an output ... but let me continue the metaphor.

Finance dudes have a completely different set of priorities - and those change from day to day as well.

First and foremost - they already are living "la vida loca". They not only have something to gain but also something to lose. They bet themselves (or at least part f themselves) every day. If they blow it, they blow the good life.

This goes for politicians (like "Dear Nancy" who blows 25,000 gallons of gas a side, doing her round trips to CA every weekend on her government supplied 767), and VCs - who are bagging the good , old "2" off a billion or so of some sucker's money.

This is where you see the Greed-Fear dynamic at its most active. And it changes.

You also have tax structures, divorcing wives, avenging girlfriends, clamoring children, leeching associates, and... in cases where the money was got in a somewhat shady manner .... a guilty conscience .... all pulling and tugging to influence funding availability.

Running to newly minted Masters of the Universe (and away from money mangers) is not much help, since a man who made it once is always of the opinion that although he may not know everything, he knows everything better.

The worst, of course, are the VCs. not only is it not their money (although they posture as if it were), they also claim to know everything as well as everything better. Yuk.

Add to this a generous layer of regulatory interference, governmental do gooders and world improvers, and you see what "getting some outside funding" is all about.

So .. to try and answer Elliot's question.

a) find the sweet spot and establish a market for your product FIRST

That takes searching, more searching and yet .. more searching. This is not for the lazy.

That really means ... "who is the super motivated buyer".

b) a "motivated buyer" is someone who takes a risk. A patient with a terminal condition is a motivated buyer for some trial treatment.

A bank which is getting robbed every day through an open window is a motivated buyer for some bars to put across those windows.

A buyer who is in "the Fedex way" (small pun on the "family way") who "absolutely, positively has to get it solved tomorrow" is where you look.

Cause ... if you got's da goods, he got's ta buy.

c) The Needy investor

If he is the motivated buyer as in "b", then he can be persuaded to supply funds on a capital basis as well as a product basis, if he has them.

Need conquers Fear.

d) the complacent investor

The self satisfied, smug, content and fat investor is not motivated by some story about raising his return to 5% in your venture from 3% in Treasuries.

In his case, Greed has to conquer Complacency.

If you can show him that you have a lock on a killer market, and he can earn 30% ... he is in.

Pension funds, family offices, etc.

FINALLY

e) how to build that bridge

there is not set way. Every one of his has to build that bridge himself. letting the VCs do it is folly, we all know to where that morphed.

Start and follow it where it leads you.'

best wishes

Carl –
I apologize for not making myself clear about the function and operation of the Early Stage Marketplace.

You write – “The very idea of a "mechanism" ... as in a transmission, for example, assumes two things that are static - the input and the output. If the input is the same (power from the engine) and the output is the same (torque to the drive shaft), you can build a transmission.”

ESM is not a “mechanism” – it is a global marketplace.

Let’s look at a Farmer’s Market . . .Farmers (Entrepreneurs) come to the Marketplace to sell Fruit. Buyers (VC, Government, Corporate) go to the Marketplace to buy Fruit.

Some Buyers are looking for Apples (bio/pharma) and some Buyers are looking for Pears (mobile apps).

Some Apple Buyers are looking for seeds so they can grow their own apples (seed stage); some are looking for saplings they can plant in their orchard (early stage); some are looking for mature trees (later stage or even Exit).

Some Farmers know that they will catch a Buyer’s attention if they put a sign on their Fruit which says – “Served in the Waldorf Astoria” or “By Appointment to the Queen” – these would be Validation Partners.

There is nothing about either input or output which is static.

I hope I made things a bit clearer.

Thanks again,

Elliott
Early Stage Marketplace
Demo – www.earlystagemarketplace.com
Corporate Site - www.thegrowthgroup.com

To post 10 Elliot

I looked at the ESM again. It is a good framework and covers a lot of what an entrepreneur can run into.

Let me try and write this next bit in as helpful a way that I can.

Such frameworks try and establish a structure that is like a stock exchange. All of us can go there and get real information about what is going on and what we need to make our projects work.

But a stock exchange is almost 100% static, except for new listings - 1 or 2 a day out of thousands - and investor perceptions about what something is worth.

Compare that to the foamy, chaotic, dynamic world of a start up where nothing is static.

Monday : let us finance through needy customers, we need a demo
Tuesday : drop that, let's get some VC money as we develop the platform
Wednesday : drop that, lets boot strap while we do a new GUI
Thursday: drop that, let's do Angels and start a web site
Friday : drop that, new innovation that changes everything
Saturday : continue with that, set up blogs to market
Sunday : drop blogs, hire marketing manager

Okay, okay ... the example is extreme ... but I wanted to illustrate the one fundamental point about start ups.

They are bottom up because ... they have to be. They are constantly changing and beaten about by what the entrepreneur discovers as he makes his way through the wilderness.

There is no other way for a start up to start except as a project that seems to all non-entrepreneurs - to be completely out of control.

What that really means is that out of 100 elements, 97 are unknown and open to formulation by the entrepreneur.

It also means that you are liable to losses, as you find the best way to make concrete the elements you need to succeed.

No one, except someone who has done it 50 times before can know how the development of the 97 unknown filaments will evolve.

Stock exchanges, frameworks, VC funds and yes ... Angels too.. want the world to be top down. They have something to lose. A double from 100 million to 200 million changes little. But a loss from 100 million to zero changes everything.

The truth is that all those marketplaces like to be top down and are .... because they can be. 97 out of a 100 elements are known and open to analysis.... hats off to the pom pom girls at CNBC. They are what every acorn pile of 100 million plus, gravitates towards.

A project that is a swirl of changing elements, is exactly the sort of situation away from which big money runs .

The idea that a VC fund of 1 billion can "average losses and aggregate winners" is conceptually the same as a one billion fund of sub prime mortgages.

The failure of VCs is that they drifted to the framework, stock exchange model from the foamy world of start ups to get their hands on the 1 billion.

As a result, VCs now want to give a dollar for a ticket only after you have shown that you have already won the lottery. Indeed their model forces them to look only for those deals.

On to solving our problems:

I salute Elliot for the ESM. It is a good framework and something that every start up entrepreneur should take time to go through. It is a checklist of ideas and opportunities that can and should be investigated by just about every start up.

Formal training is always valuable as long as you remember that formal training arose as solutions to problems that came about in the past.

My point is that the future (and the present) need solutions that are not yet part of the framework. Those solutions are not predictable from the framework itself. No mechanism can work in providing all those solutions since, by definition, a mechanism can only work for problems that are already known.

Every start up is founded to some extent on a new technology, a new vision, etc. To that extent, at the very least, the start up must find solutions outside mechanisms. That was my point in post 8.

You cannot build a mechanism when the inputs and outputs are constantly shifting. You have to rely on the one mechanism that has been the only successful mechanism for crossing those chasms.

That mechanism is carbon based ... it is the entrepreneur, the explorer, the discoverer of new worlds.

best wishes

Stemming from the desire to move investors & entrepreneurs towards some common ground 'house rules', I'd love to see some give and take, ie.

"Investors, these six reasons are why we NEED you to not be afraid to use the binary "NO".

"Entrepreneurs, these four reasons are why we focus on "X".

(More kudos to the founding members, I love this site)

VC:
"The types of startups I funded 10 years ago that I don't fund today...and why"
"The types of startups I wish I saw more of"

Entrepreneur:
"How I raised funding outside the VC community"
"How I stretched out my round to last twice as long"
"How I save and index TheFunded articles because you cannot search or browse them online"

I have a topic that both entrepreneurs and VCs could answer ...

Do these 10 things and when you approach someone for money, you will still be on your feet instead of your knees.

best wishes

One a more serious note (but only sllghtly) ...

the whole essence of entrepreneurship is bootstrapping.

Any start up is "doing the impossible" (or at least the "never been done before").

Any entrepreneur "works with the unavailable".

Being really, really good at doing "the impossible with the unavailable" is what separates the winners from the losers in our business.

comment on that

best wishes

and in the same context as #2:

VC's: This is what turns me on.

1.
2.
3.

This is what turns me off.

1.
2.
3.

glad you got a chance to get that off your chest

You have our attention - now pitch your product / service!

Dude, I so know exactly how you feel!

Now get your ass up and get to the Valley. The local chumps are exactly that. No vision. They'll be ready to invest only when the Valley guys do.

"Most of you would take six months to get comfortable enough to buy a Treasury."

Funniest thing I've heard in months, because it's TRUE!

Is the region you refer to NY or on the East Coast? Firms on the East Coast are notoriously indecisive and heavy on the bad advice. You need to create "a sense" of urgency in order to close, which sets the relationship off on a bad footing from day one.

@Been There

Agree, lol as it's so true.

The track record of the vast majority of "VCs" is so bad that they are afraid to take a step. In some ways, I don't blame them, but they are in the _venture_ business or so the sign on the door says. As counter-intuitive as it may be, that is also why they are lemmings. The risk of failure is so high they seek safety in numbers and trends.

The "whoops" here is that VCs need to remember (and remind their limited partners) that they are in a high risk sector of the investment market. They can expect most of their money to be lost because of the market, the business, the operation, the technology, the competitors, the stupidity of the idea, and a thousand other reasons.

Most VCs that I have pitched want to be in the expansion capital business. Given them a known market, with a known revenue, with known technology, with a way to limit competition, and with a product that is version 2.0 ... then they are ready to go.

What we really need is gutsy individuals that know how to pick marketable businesses run by people of _character_. Then everybody benefits ... FWIW.

Good rant. However, you are not the only unrecognized, depleted entrepreneur. Now you are at the place where most quit for all the excellent reasons you post. Lack of money is not a reason to quit; what you do now is how investors will judge you because investors can't really know your idea but a few can judge character. Most successes are more Pandora than Google, and wise money knows that.

You must be talking about Pittsburgh....?

Lol! "Most of you would take six months to get comfortable enough to buy a Treasury." Great line!

In my case, it's a media company (Cable network) and northeast Ohio, which seems only interested in tech and biomed. The area's investment firms have zero media experience.

It's frustrating to say the least. I feel your pain, and I'm getting some pressure from my wife to get results fast or choose another path, so I understand where you're coming from.

"Most of you would take six months to get comfortable enough to buy a Treasury."

In fact, I think most VCs would pass on Treasury notes because they'd say that the leadership team isn't strong enough.

I wish I had said this during my last funding activity. The "VC" term is a joke -- they only want low risk deals. My last gig I kept hearing "make it work and I'll invest..." only to hear "you could not have done that... Show me a customer..." only to hear "... but he is not like the general market, find more..." Moving goal posts. No goal posts.

Good luck. Now pitch your business and maybe we can give you some names of *real* people!

BTW -- IMHO, I agree that non-valley money is usually slower and lower. Valley VCs will at least give you an opinion fairly fast. Outside of the valley, try putting a lemming on the last slide of your deck!

so true, so true. The moral of the story: we should only listen with 1 ear, take it in, and make our own decisions...until they cut the check! We are the subject matter experts,not them!

"6 Months to invest in a Treasury". Instant Classic. Oh, and yes, VC's would be concerned about said management team, so they'd be eager to bring in some guy from their section at HBS who worked for a consulting firm...

I feel your pain. Why is it that when you reach one milestone, investors want the next one before they pull the trigger? But also realize, there are many many of us in the same boat, thanks to the economy and the fact that most investors just want to shore up what they've already funded. One thing I wish about this forum is the ability to email people off the website, sorta like a private facebook for entrepreneurs. I don't know about the rest of you, but it's strangely comforting to know that others are in like situation.

Shake it off. Then get your ass out here to the valley where you belong.

OP here.

I'm in NY State. New York City might be the financial capital of the world, but it might as well be 10,000 miles from upstate NY where I am. Just as an example, one of our our local "venture capitalists" is so bold and brave that one of their investments was in a hamburger processing facility. Yep, bet you didn't know that burger processing ranks right up there with high-tech, semiconductor & life sciences for VC's. (Ironically, the processing plant went Cha. 7 after an E-Coli outbreak. Who woulda thunk?)

Whoever mentioned the herd mentality hit the nail on the head.

Funny thing is that in my case, you don't have to be a techie to understand my business. Sure, we use tech as a means to an end, but it can be laid out in a very bricks and mortar fashion with quantifiable results that once again.....ANYONE can relate to. I've bootstrapped this to the point where I have several large potential customers considering it, and its pretty damn impressive, but geez.....when they do DD, all they're going to find is me in my messy little office.

I'd be interested to know from other CEO's if their investors (angels or VC's) have actually been able to add REAL value beyond the written & cleared checks? I ALWAYS make it quite clear to potential investors that I'd like to work with someone who can bring more to the table, but I can't honestly look back and say that any of them has been able to offer anything insightful or beyond what I have thought of. Does it happen or is it just an exercise in ego for the investor?

As far as packing up and moving to the Valley, I can't. I'm 42 with kids in school. I'll bend everywhere else, and if I were 25, it would be a different story.

Ok, done bitching. Far too many positive things I can be doing. At the moment, its not doing me any good to be glossing over the tales on venturehacks from CEO's who 'raised $200K in 21 days'. I could just kill those bastards. ;-)

I fell your pain (really, I feel it!!).
Now take out the budget spreadsheet, figure out the boot strap approach, do some consulting (or get a 'day job') for personal cash flow and make it work - 'friends and family' one more time!
This will be the moment you look back on and say '.... I was ready to hang it up, but pressed on!'

"I'd be interested to know from other CEO's if their investors (angels or VC's) have actually been able to add REAL value beyond the written & cleared checks? I ALWAYS make it quite clear to potential investors that I'd like to work with someone who can bring more to the table, but I can't honestly look back and say that any of them has been able to offer anything insightful or beyond what I have thought of."

I too am way off the beaten track, and we ended up getting money from a local VC. I think it may be a blessing in disguise that you have been told no. Not only is there no value add, they are very likely on the edge of killing our company. They have a priority position, and are holding onto it so hard that they are making it impossible to raise new money. They don't have any capacity themselves. Their Board Member is truly awful - no experience with tech at all. He is a VC in training diapers and we are training him. You DO NOT want idiotic money like this.

If you want to do a tech company, get into an environment where there are lots of investors that know what they are doing, and you have a chance of seeing some value add.

I hope you feel better now! Back when we first started doing bio/medtech startups we listened to the experts, read all the books, went to the meetings, pitched at the events....

... all the stuff we were told to do by the "experts." Please don't start me on the idiocy of any business plan that won't fit on three pages, or the Big Name Advisor ego games, but I'm digressing. Pretty much all the advice about what to do and how to raise money comes from the VCs or the small circle of professional C-levels that the VCs replace founders with. It's sorta like getting advice on union organization from the owners of the factory.

Stick to your own plan, bootstrap, and figure out how to get your customers to pay for your development.

VC are idiots. I don't mean that in a ranting, contentious or disgruntled way, but rather a quite literal one. They don't want risk. They want a sure thing, which most have NEVER found. They want to be bankers who are known as experts and can give a company some, hopefully, small amount of capital and own most of the company. They have you praise them for guiding you to success because they are geniuses.

Most VC would have been more successful taking their LPs capital and going to Vegas with a professional poker player. Their most recent 10 year returns are shit.

As a rule, I won't even talk to a VC that has not been an entrepreneur in my sector of technology. MBA from Harvard and a top notch investment banking background? I don't give a shit... go pound sand because you don't know anything about what I do. Super successful operator at a Fortune 500 company? Good for you and congratulations, but...same thing.

OP, you are not alone. You have to go through this to understand that this is just how it is. If you were 25, you'd probably have gotten funded because the VC would know they can take 75% of your company and then make your the company janitor.

First, go get a job at Starbucks (or wherever) to lessen the burden at home. Next, find a way to raise some friends and family money. $5K here, $10K there can add up. After that, build a plan that has you working your start up with your F&F money and a part-time job until you hit the milestones necessary to get funded- customer and maybe revenue.

Good luck.

Oh yea, if I were you... I'd be doing anything I could to talk to Chris Dixon or others at the Founder Collective. I respect those folks and they are in NYC.

Here's the way we look at it. We are also bootstrapping our company, with a mortgage, kids, large debt on our credit cards, etc. However, we didn't sell our souls to the VC devils who would take our hard-earned equity and lord over us. Hopefully for you (as we are hoping too), in the long run, you would have retained full equity and ended up reaping the full exit benefit. That's the dream and I sincerely hope you get there. If I manage to get there, I'm going to set aside some funds for investing in early stage start-ups because I understand what it's like.

May I ask you a question

is the business case (not the business plan) still viable.

If it is, then nothing stops you from succeeding except your own lack of determination.

You may to get "junk yard dog mean" in order to succeed and ... so what?

It is only for a few years until it all breaks your way.

the limits of your enterprise are determined by the limits of your own determination.

Don't look at the other guys who seem to put some start up together and 3 months later have 5 million visitors and 5 VCs lined up outside the door.

People win the lottery every week (and 90% are broke in a year).

How many "experts" and "gurus" in our industry are really just people who stepped in some luck.

And how few can do it again, even once more. In SW you can name those people on one hand. I know of two ... Jobs and Clark ... everyone else has failed in their subsequent attempts or is still in his/her first deal.

Someone with real internal grit can make it once and then twice and then ....

best wishes

PS : some practical advice on the way you have done your deal ... if you can't do it with other people's money, do it without their money.

A real entrepreneur would know what I have just said.... and would know, deep down, that it is the truth.

to anon # 22

I am in exactly the same situation as you and can empathize/ commiserate with you.

The real thing we are saying when we say "I will do some start ups right when I have a chance" is that we see ourselves as being willing to risk ourselves (as much time as money) when we do the next deal.

Good deals no longer walk in the door - and that is the dirty secret of the VC world. Good deals have to be created in a hot house and VCs (and most angels, these days) are not willing to do that.

good luck to you, when you are ready, look me up

best wishes

I am going to share one simple truth with you that will not only explain all of your past experiences, but hopefully give you the secret to future funding…

First let me say that this truth is very sad, and it actually bothers me quite a bit; nevertheless, truth is truth.

People are people…angles, VC’s, etc., etc., and when it comes to investing (and selling for that matter), it is completely driven by irrational emotion. And emotion is driven by marketing. From Hitler to the tulip craze, even really smart people will consistently ignore common sense and behave like lemmings…

Now that you know this truth, what does it mean for you? Well, for starters, you need to start acting the part and dressing the part…

Wear black, LOTS OF BLACK. Never wear a tie (or even a jacket) to an investor presentation. I don’t care if you don’t have another investor meeting scheduled for three weeks, no matter what happens always reschedule the first meeting….ALWAYS. Be polite, but interrupt when it looks like they don’t get it (and they never do). Be friendly, but impatient. Cut the meeting short (even though you haven’t finished). Never tell them you have “lots of other investors to meet with this week”, they will instinctively assume this is the case.

Basically, play hard to get. Act like you have a zillion dollars in your account and you are doing them a huge favor to meet; better yet, vaguely act like you don’t even know how they got to meet you personally instead of one of your junior assistants.

I had a brilliant idea and a fantastic business opportunity; but it wasn’t until I started pretending to have it all going on that everyone wanted to get onboard with me. Being from the south, it’s very difficult for me to be duplicitous…but even if you have invented a time machine (that works perfectly and runs on water), you won’t get investors unless and until they experience a “call to action” and there is no other call to action on the planet like greed and, more specifically, the desire NOT be left out in the cold…

I have watched total losers get ridiculous levels of funding for the dumbest ideas on the planet (that went on to fail in spectacular fashion)…but they got funded because they convincingly acted exactly like they were the only girl in a bar full of sailors after 6 months at sea…

If Bill Gates hadn’t lied his ass off to IBM, we would all be worse off. Never, never, never lie to an investor about real data (projections, P&L, balance sheet, product stage, etc., etc.), but playing coy about the number of other prospective investors interested in you is often the only way you will ever get a check…

Take several days to return their calls; don't be an asshole, but do not be deferential - you are the next Steve Jobs and they are lucky as hell to be in a room with you...

I desperately wish early stage investment was based upon real intel and logical DD; but it simply isn’t. Sadly, it is far more about emotionally driven perception than legitimate opportunity…

Silicon Valley is even worse...you don't need to move. Everything you did with your prospective investors was exactly the opposite of what works (obviously).

You sound like a really smart, earnest person (who probably has a great investment opportunity). Evolve your approach or get a job...

Since a VC's incentive is the "2" and rarely the "20"

I believe that they won't care.

there should be a section on the funded that points out the firms who do this. I know of 3 from first hand interaction. each time, the founder went on to create a new more successful company with the right investors. each one was different and they learned from it. The investor groups (not just vc's but angel groups - which are the worst at this) need to be named in the spirit of this site. thoughts for all on this before i name names --

I agree with naming names of VC's who as a matter of course fire founders. This has not happened to me (yet) but I remember a VC coming by a booth at a trade show once. One of his VC friends happened by and the first guy started bragging about all the CEO's he fired. It was like a notch on the gun kind of mentality. Guys like that should be called out. In this case I cannot remember who the guy was, as this was a while back.

We should maybe add they want to buy the entire business at a significant discount to current valuation.

Maybe there should be a disclaimer on term sheets - warning, hazardous to your continued employment as CEO. But you already knew that, right?

An alternative possibility is that the system functions effectively overall. No doubt there are instances where founder CEOs are removed incorrectly - and those are unhappy stories - but in the grand scheme of things, perhaps the founder isn't *supposed* to stay for the full ride?

My personal view is once you take the (expensive) money that you need to fund your venture, you must do so with the full knowledge that you may not be around to see the end of it.

BSquirrel - so true.

The only real way to assure that the CEO (founder) gets a fair shake is to make sure the board is "fair" and not stacked against you. If unreasonable investors have little power to be unreasonable, then you are fine. Also, if you suck as a ceo, then with a fair and balanced board, you will be and should be removed. As a founder, if you cannot take an investment under these terms -- don't take the money. If you have to take the money under these terms, then you get what you get!

I agree - mostly. What founder/CEOs need to work on is sales and marketing. Products & services never sell themselves. They require nonstop marketing and sales efforts. The founder/CEO who "gets that" is a lot less likely to get bounced out. The founder's passion needs to extend to all aspects of the enterprise, including investor relations and fiduciary responsibility. Those are the founder/CEOs that are "investment grade".

Sorry to be the contrarian here. I've founded a few companies and run about a half dozen others so I TRY to look at this issue from both sides.

In this case, I think the author left out the most important and common reason the founder is replaced and that's because investors think there is someone better than the founder to run their company. You can view that as an investor bringing in a friend, but that's a pretty cynical view.

First, investors don't boot founders so they can buy more equity. Today investors can buy equity at private companies at pretty cheap prices. It's a buyer's market. They don't need to eliminate the founder to do that, they just dilute the crap out of them.

Second, the founder, by definition, has accepted the terms of their financings which often include adding new directors to their board (losing control) and bringing in a new chief executive. If a founder doesn't like those terms, they shouldn't accept the money.

Finally, for every founder like Steve Jobs that has led their company to extraordinary success, there is a professional manager like Eric Schmidt who parachuted in and took their company to the next level. I don't think investors care if it's a founder at the helm, they just want to optimize their chances of success (read: high stock price = large capital gain). If Jeff Bezos (Amazon) decides to start another company, I'm sure his new investors won't want to replace him. On the other hand, if Julie Wainwright (Pets.com) starts another company, she may be the first to go.

The key to this dilemma is the Founder and his/her attributes, attitude, and the complexity of the task. It is very rare to see the founder take his/her company forward to commercialization in the life sciences. Founders typically do not have the breadth of skills (nor appreciate what is required) required to guide the company's development through the regulatory maze it faces - both here and abroad.

I "agreed" with the post, but a VC who is giving me some *side help* said to expect it and keep a seat on the board and be a CTO or other role that suits your temperment/background.

@pogo: Investors boot founder CEOs all the time for more equity, even in the market today. Most private companies don't sell equity to just anyone. So, if a hot company does a new round and the old investors do not get good pro-rata rights in the deal, they will act to remove the founder CEO. It's happening to a friend of mine right now.

Also, your definition of "investors think there is someone better than the founder to run their company" leaves something to be desired. What do you mean by "better?" From a VC perspective, this means someone who can get the company to a sale or IPO faster, which is the point of the poster. Sometimes, a company should not sell or hasten an IPO, but the investor needs liquidity. This is not better for the company; it's only better for the investor.

I am willing to bet that most (~75%) of the venture IPOs filing S1s right now are being forced out by investors. The founder CEOs would rather not go public, but going public is not a horrible outcome, either. I know of at least two that are in this camp for sure.

Don't fire the founder. Pure and simple. Chances are that if a founder feels inadequate, s/he loves the company so much that s/he will urgently ask to bring in someone else. re: Larry / Sergey.

Again, just don't fire the founder. Pure and simple. It's not difficult to understand.

Another blog post on this topic

http://yoda.posterous.com/

I'll stand on my statement.

I never said that founders don't get fired for the reasons stated in the original post. I said that there is a FAR more common reason and that is that investors want to bring someone in who is more capable to run the company.

@10. You said "from a VC perspective, this means someone who can get the company to a sale or IPO faster." Duh. Yes, that's PRECISELY their motivation. You didn't know that? If they weren't seeking liquidity, they wouldn't be called INVESTORS. They are looking for someone to get it done as fast and as big as possible. Period. They have NO OTHER motivation.

As I said, if the founder doesn't like those terms, don't take the money.

I believe we are OK right now. But I guess continuing to pressure Dodd and your Senator definitely couldn't hurt.

The Angel Capital Association and others have been quoted as saying that those toxic provisions are now out of the current version of the bill:

http://tinyurl.com/28r4rry

http://tinyurl.com/24allgm

Like everything, though, it's not over until it's over...

From xconomy

"Many state regulators reportedly are still continuing to seek to expand their control over private fund raising and might oppose these positive steps for entrepreneurs. We hope Senator Dodd and his colleagues continue their support of entrepreneurship, job creation, and economic growth and pass the legislation and these amendments."

Dodd is out. he is now a lame duck.

So the "old Dodd" - the man of many a compromise - is gone.

He is trying to go out ... "Dodd the iron man" and be remembered for some vast earth moving piece of crap legislation.

Next January 20th, he will be Dodd the forgotten.

Dogpatch charges rent in other locations outside the Bay Area. The program is an optioning scheme for polaris to identify more dealflow trends and opportunities with less cash. It would be like movie studios having free offices for screenwriters.

However, I do like the way they look at it as "open source" entrepreneurship.

Dogpatch charges *a lot* for desk space in SF, and it really is a "frat house for startups". If you want to start your company in a frathouse, then it may be a good choice. However this is not for everyone.

Anonymous and Farnsworth you have your facts wrong. I'm a dogpatcher and none of the three Dogpatch locations charges residents for anything. Also, calling it an "optioning scheme" also seems misplaced. Polaris does not have any equity rights on the companies in the program.

From extensive experience on this matter, EIRs are ...mostly... bad news. The benefits of undrstanding are overshadowed by the reality of idea theft, solicitation, etc. Just my $0.02.

I disagree strongly with one of your points - betting on the horse and not the jockey. I am running my second medical company (first was a biotech, second is a medical device). From these experiences and seeing countless other companies operate I am convinced that the people are the absolute most crucial part of a company. The technology is a distant second. The reason is because things never work as originally planned. NEVER. You need people who are scrappy, creative, inventive, and able to adapt and overcome. I completely understand why VCs bet on jockeys and not on horses.

Carl - Other than complaining about the current "system" what are you doing to change it?

FULL DISCLOSURE HERE... I dated a woman whose brother in law was an EIR and I only know of two other EIRs.

Respectfully, I agree with the first poster. EIR are often glorified principals that are there looking for ideas themselves. They are often VCs, without power, or money. And they are often -- not always -- first time entrepreneurs themselves.

AND THEY DO NOT SIT ON BOARDS. Too transient, inexperienced, bitchy.

Take Barney Pell, for example. He was one of the founders of PowerSet -- another Google Killer! He DID have one company under his belt, where he made no money for his first investors -- Carol Sands and her collected idiots. After a rocky time back at NASA, he became and EIR -- I believe in Menlo or Sequoia.

At PowerSet he blew a LOT of smoke up peoples' butts. And I mean a LOT. He was asking for $32.5Mil pre-money from his ANGEL round. After several years of chaos, he was demoted to CTO and was forced to sell for $100M to Microsoft.

As an aside, I like NYTimes. In fact, I am subscribed to their daily email. But when it comes to articles on entrepreneurship, they are really poor. Read WSJ, or for an international view FT.

I would Absolutely LOVE to hear what other "publicly available" publications people read. Should we start a separate thread on this?

#2 (gorilla44): Regarding your view that people are the most important part of a startup and the technology is a distant second:

Warren Buffett quote: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

and

"You should invest in a business that even a fool can run, because someday a fool will."

I agree you need people who are scrappy and adaptive and can find the idea, but you still need the "idea". Without the idea, there is no sustainable, growing business. My first company was acquired by a larger, successful company that had mediocre products and management, but it was a great business: the money just poured right in because we owned something in the customer's mind that the customer wanted, and we gave it to them at a profit, over and over again.

To Gorilla 44, post 2

Okay, we can agree on the need for good management.

1) My point is a simple one. Good management is built around a great idea. Groups of "great management" who are just hanging around looking for a good idea is an "urban myth".
They don't exist, in a vacuum.

Start with a great idea and add one great manager. He can do the rest and the entire effort is based on a project which will be worthy of their time and devotion.

Let none of us remember the pet foods dot com fiasco, where VCs backed a great group of guys with (as I remember) 50 million.

What a great demonstration of the virtue of backing the jockey that project was.

2) When a VC supplies the management, the situation is already defective. Any manager who is "VC compliant" and accepts the VC termsheet, is NOT, repeat NOT, great management.

He is a whipped dog, ready to roll over and wet himself whenever any VC lifts a knuckle.

You want "scrappy, inventive, creative, etc.".....?

The best of them come for a great idea.

3) I am not complaining about the system at all. I merely point out that a certain situation was allowed to obtain where the focus shifted from producing great companies to obtaining VC money.

The fault lies in almost every entrepreneur - he should look in a mirror.

as far as what I am doing to change it ... two things.

a) I conduct myself with the discipline to bootstrap my own projects and do not solicit defective money.

b) I have been writing emails to friends of mine about a thing I call a SCC - a seed capital corporation.

I will open one up once a certain current project of mine is brought to a boil.

I will give you one clue as to how it works. There is no "2 and 20". But there is a "50".

The management people with whom I am dealing, will pay their own salaries, car leases, etc.

But we want a very much larger share of the carry. The answer is to put back, in place, the only incentive that matters ...

Never make your profit out of the other fellows in a deal, but rather ...

make your profit out of the success of the project.

A private jet is what you get when you win, not when you play the game.

best wishes

VCs are idiots because they think entrepreneurs are idiots and insist on terms that only idiots would accept. A good jockey will have stables of horses to choose from, putting on a different hat and going with whichever one is appropriate for the given track and rain. Sometimes if the environment is right, the horses win treasure and gold, other times if not as bright, will do other stuff instead. If they eventually get greedy enough, they'll realize they're nothing, loosen the terms to appropriate levels, and then maybe they'll get a little closer to understanding the ability to see all the value hidden in plain sight. But if they could do that, they wouldn't need to be LPs lackeys, would follow their own inspiration, and the rest of the entrepreneurs are back at square one. So, best to understand their situation, practice preventative damage control, keep all interactions with such realities to a bare minimum.

To ANonEMouse2 # 3

You have nailed it.

Grab the dirt. Get the underlying ground, via IP (patents) if you can. then find the jockeys.

Putting "Willie the Shoe" on top of a broken down donkey will never win you the Kentucky Derby.

But even my dead grandmother has a shot at winning that race on top of Secretariat. Just strap her on, and kick that mule ... watch him run.

The idea is the dirt, the underlying foundation.

Learn it, love it, live it.

best wishes.

To Ted #3

To express your post another way ....

An EIR without a great idea is like aloud mouthed eunuch.

Did I get that right?

:)

best wishes

Carl - I'm not trying to attack you. I just think that it is wrong to say that all VC is bad and that all entrepreneurs need to avoid it.

The important thing is that when an entrepreneur deals with any potential funding source they need to understand that source. VCs are ruthless, professional money managers whose job it is to get the maximum return for themselves and their LPs. Some may be able to ride the 2% management fee for a fund, but the best VCs do provide a strong return to their LPs and are able to raise new funds.

I am curious to learn more about your seed capital corporation? Can it work for a biotech or med device company that needs to raise tens of millions of dollars before their product can hit the market?

Riding Secretariat... that's the dream!

As I see it, you and The Founding Member and Georges at The Venture Company are covering all the bases:

Carl Wimm: disciplined bootstrapping, entrepreneur maintains control, bottom-up innovation (ala Microsoft), ignore VCs unless they truly bring something to the table on your terms;

The Founding Member: work directly with VCs, create rating system driven by Founders and real entrepreneurs, share information between real entrepreneurs to encourage better deal-making and company-building and better VC behavior;

George van H. (The Venture Company): work the layer about VCs, i.e., the LPs; train the LPs on what better venture investors should look like and how they should behave; train entrepreneurs to make better deals; re-analyze the whole structure so that maybe, someday, big venture investments by savvy capable venture investors confidently supported by LPs can be made again. After all many successful, large venture investments have been made and have paid off.

It's great to see all this innovation in the business of funding innovation, good luck and best wishes.

Matthew O'Keefe

to gorilla44 - post 9

My thanks for your comment that your contributions are not a personal attack. I appreciate the spirit and am motivated to contribute back.

The first point you make is one where "you nailed it".

"when an entrepreneur deals with any potential funding source they need to understand that source."

My contributions to this forum have been slanted to putting up views of VC to enable more understanding among entrepreneurs for the time when they approach them. (BTW the dating post is great - I have printed it off and will keep it for reference).

On the second point ...

"VCs are ruthless, professional money managers whose job it is to get the maximum return for themselves and their LPs" ....

Take the word "professional" out of this statement and we agree. ... how many comments have we heard that VCs don't understand, either the project or the process.

How about this version instead ....

VCs are ruthless and relentless managers of other people's money, in pursuit of their own rewards (and, once in a while, those of their LPs), one of whose almost mandatory tricks is to dilute founders to near nothing, both as to equity and control. The effect of even one dollar of VC money is turn the project inside out, where the sole focus now is that of the exit, always on the best terms favoring the VC.

Now ... that nails that statement.

I have written many times that if you get into bed with a VC, know what you are doing and what sort of experience you will have.

The third question - The SCC. Here are the essential elements of it.

You have to de risk the project.

Is the market enormous?
Can you own the underlying dirt (Patents, patents, patents ... three levels deep)
Can you demo it - people need to be taught and shown
Can you find the right people. (I rarely accept an inventor as a business manager)
Can you deliver it in a non castrated structure? (are you a deal maker or a deal taker)

You know medical and bio , better than I ever could. How long would it take (and how much would it cost)to answer those questions in your domain?

best wishes

TO AnonEMouse2, post 10

As you have pointed out, several people are working on things to overcome the "lead blanket" and cloven hoof of the VCs.

Since the old VC model is so defective and dangerous for just about any project, a new model has to be found.

I don't know anything about George van H and the venture Company. I do, however, appreciate the pointer and as a consequence of what you have written, will make it my business to learn what I can from this man and his contribution.

I do know something about the Founding Member. Adeo is quite a fellow.

His work, not only on the web site, but also on his Founder's institute, is something that all 13,000 of us would do well to learn. The FM has his approach and it is a good one. It solves many issues, addresses many problems, exposes many pitfalls, proffers solutions, etc.

Has he got all the answers, ... perhaps not. But he can, in the space of a short time, get novices fairly functional and competent.

My SCC is designed to approach innovation from a different POV. Does it offer "all the answers", perhaps not. But, it need only offer those answers required for its own approach.

Ultimately as innovators, we have to start viewing ourselves as professionals. We are "pros".

We have to understand the obstacles to innovation and the opportunities. We have to understand that to be true innovation pros, we need to act as the "freest men on earth".

We have to understand that our goal is to deliver innovations in good order to the market, all the while assuring that the fruits of that innovation are delivered to the founders and the management team.

In time, we can view this process almost like art. The process itself is beautiful and good, in and of itself.

best wishes

I agree that VCs and IBs are different to some extent, but that "extent" is highly firm-dependent. Some VCs are really entrepreneurial and some are not. Some IBs are moderately risk-oriented and others are not. That's all good because the market needs an entire spectrum of funding options.

What's bad for everyone is the deliberate misrepresentation made by a number of VCs and LPs who claim to be what they are not.

What REALLY should be done regarding tax rates is quite simple: only those monies that are actually transferred to companies to grow them should be taxed at the lowest capital gains tax rate. Any income derived from the rest should be treated as ordinary income or some intermediate rate between W-2 and the lowest capital gains tax rate.

This modest step alone would provide an incentive for limited partners (LPs) to choose only those VCs that put the vast majority of their investment money into an actual company versus using it for overhead. Otherwise, their tax situation would not be nearly as attractive.

This modest step would also encourage VCs to make better investment decisions and encourage them to reduce the "2" of the "2-and-20" rule.

It's like choosing a charity: is the majority of the money really going to help people in need or is it merely for advertising and fund-raising efforts? Efficiency in this important space is essential and this step would do a lot to improve it.

>The correct statement is

>Certain VCs will "interview" entrepreneurs who start new companies >from the ground up.

>But "work with them"????? Hell, even Angels don't do it that much >anymore.

They "interview" entrepreneurs, find out what they have and then turn their ideas and inventions over to their portfolio company until ...
Check out this story about why Agami shut down mysteriously
http://www.indusbusinessjournal.com/M...%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=57350E0A348D4E338A2C68208221E12E

KPCB was an investor of Agami.

Amen!!

One of the few VCs I have worked with over the years who actually does add value to a company sees this as problematic to the industry. In his words, if we have to pay ordinary income tax it becomes a much less attractive career option.

That may be a very good thing as a shakeout of those VCs who are only in it for the capital gains rate taxation and the ability to make money vs. those truly entrepreneurial VCs who enjoy starting new ventures would take us back to the 70's and 80's and get rid of the B-school types.

It is very hard to argue that someone who puts nothing at risk (VCs) but manages someone elses money should receive capital gains treatment. When they have run your company into the ground and put you out of job, they just turn to their next portfolio company or investment, while the entrepreneur, who has risked everything, is out in the cold and the LP has lost a boat load of money.

TO Duffer, #4

Taxation is almost not the issue.

Like bankers who get 50 million bonuses for destroying a financial system, VCs who get cap gains, are viewed as undeserving.

The financial model (banking) is going to change and so will the model by which funds are brought to innovative projects.

Both changes will be painful because so many sectors have been spoiled by easy, undeserved gains.

but it will come.

best wishes

The Founder Institute is considering a variety of locations in Europe, Asia, North and South America. The next set of semesters will likely be announced in April, 2010, assuming that all goes well with the launch of Singapore, Paris, Los Angeles, and Denver.

If you are interested in leading one, just click "Feedback" on the Founder Institute site at the bottom.

http://www.FounderInstitute.com

Well said. This is exactly what I'm feeling. The defintion of Angel/VC capital seems to have radically changed to the point where there is no capital doled out unless there is virtually no risk.

To # 1, Livu

Actually, it seems to be a natural progression. Immigrants to a country work real hard, their children go to high school and get good jobs, their grandchildren get into universities.

Soldier to merchant to artist, in three generations.

VC to mezzanine investor to participating lender, in two evolutions.

So .... assuming it is natural, it is incumbent upon us to know the process.

We all went to the Angels, starting 10 years ago, when VCs matured into third level investors.

Now the Angels have evolved into mid level investors.

That means it is time for a new layer to emerge and appear.

It will be some sort of small fund, expertise laden, start up specialist.

And that is where we go.

For those of you who have not gone to the Founding Members presentation on how he is leading one such charge ...

let me highly recommend it.

Inventive approach, dedication to the art and very flexible in its methodology. Adeo has some really good ideas.

I am not saying he has all the answers. BUT he has a good set of them, which are internally consistent in and among themselves.

After you see his preso, you can decide whether some or all of his ideas are "your cup of tea".

But as innovators, we have to be thoughtful as well as action oriented.

Since a large portion of TheFunded is in the Valley, some thought should be given to

a) setting up a series of presentations in the Valley - invites to TF members only
b) video taping all of them
c) making the videos available as downloads for us to go through on our own time (and place, if we are located in the Maldives).

best wishes

It's interesting that venture investing has become a sort of specialist-driven, high risk form of technology picking. A core problem was the move in the early '80's away from have venture partners who had strong experience actually building good companies - operational experience. SO today many VC's have no actual operating experience and really aren't positioned to provide relevant advice. So they are now simply playing the odds rather than trying to actively drive growth and development of strong businesses. Experience has shown that having real entrepreneurs spend time helping entrepreneurs build their companies results in a higher percentage of wins in a VC portfolio. The question is when/if the investor class will begin to demand that VC's have that experience of having to meet payroll... IF they do then I think that you will see a real restructuring at the early stages of venture investing.

To: carlwimm
Where can the "Founding Members Presentation" be found? And is there more from Adeo?

Thank you

to woodsmit

All questions to Adeo should be posted as such:

Dear FoundingMember (Lord of the Valley, Protector of the Poor, Defender of the Faith) ....... I humbly submit my question.

Adeo is very good about answering such questions directly. As he runs the Entrepreneur Workshops and Program, this is a subject very close to his heart.

best wishes.

Carlwimm, part of my pessimism (which is quite contrary to my nature) is due to the fact that I'm located in a region (upstate NY) which consistently lags the rest of the nation in supplying the various fuels that encourage entrepreneurial endeavors. So while I can appreciate and agree with the cyclical nature of what you're suggesting, I have to temper my eternally optimism with the reality of our geography.
This is by no means an isolated situation, but the somewhat glacial pace of change remains quite frustrating. As a hometown guy that wants to be a part of a rust belt town resurgence by growing a sustainable business, I always lament the lack of local progression within the local business community that either holds us back or forces us to take our ventures elsewhere.
(Scuse my rant, trying to post coherently while doing my best to manage a beckoning bottle of Merlot)

To Livu

These days, as long as you have broadband, less than 2,000 dollars of equipment keeps in touch with everything you need to do.

From anywhere. I reach people in 7 countries on a regular basis, working on a number of projects. I even spend the winter in a country with no tech entrepreneurial spine at all.

It no longer matters. The right people can be found worldwide for whatever you need.

The more interesting question is what is going to happen to places like the Valley when innovation can come from anywhere at any time.

best wishes.

I agree new models will emerge. My collegues and I have been working on a few.

Valuation is a function of how much capital you need, opportunity size, the strength of your team, exit opportunities and a whole bunch of factors that are not based on revenue.

You would be much better off if you wait till your 1st revenue is coming in. Not just signed.

A reasonable value expectation for a Canadian SaaS business at your stage is between $1.5M - $ 3M pre-money.

So, at the high end, if you raised $1M at a $3M pre you would sell 25% of your company 1/ (3 + 1).

I'm in Canada, so if you have more questions just ping me (mark@startupcfo.ca).

There is a lot out there on this but I usually recommend to clients at your stage of development that they use convertible notes to avoid the whole valuation discussion at this stage of your development.

I've been through this a few times here in Canada. Happy to help. Ping me at: bradmarshall75@gmail.com

I agree that a convertible note is preferable at this stage

I agree with Mark on all counts -- re. expected valuation for a Cdn SaaS company and especially re. the importance of waiting until you have revenue in hand. The funding climate is still skittish (especially here in Canada) and you'll have a hard time getting either angels or the few remaining active VCs in the country on board if you are pre-revenue (I'm a founding member of the largest Canadian angel group, and a twice-funded CEO, so I've seen this from both sides).
Cheers and good luck.
--Richard

Speaking again as a Canadian

Valuations are done by outside valuation firms. You odn't negotiate it, the way you seem to be able to do in the USA.

But as I have posted elsewhere, here is the trick. For the purposes of a CPC or other CAD public company, there are some things to know about the effects of a valuation.

Suppose the valuation firm says your deal is worth 5 million dollars.

1) If the assets are "real" - cash, bonds, real estate, machinery, inventory, - then you get a "real" notation on that part of the valuation.

The shares you get for that portion might be free trading and not restricted.

2) But if a portion of the deal is not "real" - things like patents, goodwill, etc. - then a notation is made that this valuaiton is theoretical (I forget the word they use).

That means those shares are restricted and may be canceled if certain performance standards are not met. The terms of that are set by the supervising authorities, not by you or the broker.

Now .... this is matched against the value of the company you are vending into.

If there are 5 million shares outstanding (restricted and free trading) and the share price happens to be 1.00 - because 1,000 shares last traded ... the entire company is deemed to be worth 5 million - without question.

The fact that there may be only 500,000 in the till and nothing else does not enter into it.

The game is rigged to value up the pubco and value down the project being vended in.

Why ? well, quite simple. The brokers and their friends own the exchange in Canada and they own the pubco.

You are a supplicant, entering their domain.

Valuation companies in Canada are well known because they will have done 50 valuations for the exchange - and they know what is acceptable and what is not. You won't be able to influence them much. You take what you get.

That is why I prefer the US route - where the business of becoming reporting is between you and the SEC. The 15c211 is between you and any broker - limited to that transaction.

Easier and cheaper to "roll your own".

And if the TSE is so important, after you are listed in the USA, you can much more easily apply for a co listing on the TSE.

Best Wishes

Please keep in mind that an investor will get a position on a board (or two positions). Let's say you will raise $1M and will sell 25% of your company as someone suggested. After you will pay the lawyers, and all kind of fees (some of it back to investors in various forms), the amount will be a bit smaller. I do not know who are on your board now, but the moment you will get an investor their loyalty (especially the independent board member and all consultants that now work for you) will be with the investors, simply because they pay the bills (even if you will be signing their checks) and can potentially provide them with jobs in the future. I hope you do not expect to get the money without the performance milestons? You will have to sign for them. The terms of the agreement will be clear enough to explain what will happen to you, if the company will not perform according to those milestones. There is one thing, that may or may not be clear in that agreement. This investment will be a loan with your personal guarantee. In case, if it will not be clear, do not expect your company lawyer to point this out to you, because he is not your personal lawyer. The point that I am trying to make is that your situation may be a bit more complicated than it looks to a consultant, or I maybe too naive to believe that the consultants do not know better.

To Jetskier:

The premise of Michael Greeley ... "There will be fewer firms, fewer venture capitalists, by this time next year," is nonsense.

He defines a VC as someone who has no stake in any particular technology and product and just functions as kind of a moneylender for other people.

How did the VCs control that conversation????

Every start up ... which has a founding member that injects his own money is a venture capitalist. Every start up that risks personal and private equity has a VC or multiple VCs on board.

Restricting the definition to the moneychangers does all of us a disservice.

The focus on the moneychanger contribution to venture and to capitalism is misguided, to say the least.

The Founding Member has plans to introduce 1,000 companies this year that are start ups through his Founders Institute. They are all VCs.

Change the terminology. The moneychanger portion of the CaptilistVenture sector is dying.

That I can accept, as it is the truth.

BW