Darren Herman

Funding Strategy

The NY Times sparked a great posting by ValleyWag which focused on the ways to raise funds for your startup.  While these strategies have a lot of subjectivity to them, they tend to hold true for the most part.  Take them with a grain of salt.

Venture capitalists

• A VC firm raises funds from investors, then invests it in startups, usually at upwards of $1 million per company (and sometimes as high as $12 million or more).
• A VC firm is buying a share of the company -- anywhere from a tenth to a third (or more!), depending on how much the firm decides the company is worth before the investment.
• If the company needs more money a few months later, the firm may invest again, or a different firm might invest. Companies often raise funds from multiple firms in one round.
• VCs want at least three times their money back, though they expect most deals to fall through
• Many companies only take VC funding after they've used up the funding from their...

Angel investors

• These are often the first investors in a company, most always used before venture capitalists.
• Angels invest a few thousand dollars. As with VCs, several angels may invest in a startup at once, for a total round of anywhere up to about $1 million.
• They have less of a business interest but more emotional involvement.
• Angels can be friends and family of the investee, but some startups raise a preliminary friends-and-family round.
• Or they may go even smaller and rely on...

Personal credit

• When is it healthy to run up a 20%-interest-rate debt on plastic? When it's cheaper than running up a 200%-interest-rate debt on VCs.
• Of course, you could also rely on your own cash reserves, as many startuppers do with their second companies -- Evan Williams, for example, who used his windfall from selling Blogger to Google to buy out the investors in his new company, Odeo.
• Ironically, credit card funding is a far cry from other way to borrow from banks...

Hedge funds

• The 90s bubble was partly blown up by VCs, but the big money came from hedge funds -- an adventurous form of private investment fund.
• They're not as involved this time -- the money's too small, at least for now -- but they powered many a startup in the 90s, when more tech-savvy VC firms hadn't dominated the Silicon Valley funding industry.

Ali G - Seeking Investment

Venture Capital pitches gone bad... well, maybe for Ali G, this is considered good.  In a skit about pitching a new product to potential VC's and money men such as Donald Trump, Gaspedal Ventures, Starvest, and others, Ali G does everything your not supposed to do.  Check it out:

With the recent release of Borat, I couldn't resist posting this blog.

When To Approach a VC

I am about as passionate as anyone regarding entrepreneurship. I work and play amongst circles of entrepreneurs and always offer guidance to any aspiring business-minds who are trying to hatch their killer idea. Most of the time, I am lending advice to early to mid-stage startups about strategy, product development, or finance. While my strong point is not finance, I certainly understand the process at which an entrepreneur must go through to execute on a funding strategy and ultimately, close the venture deal.

I’ve decided to take some time to write a check-list that an entrepreneur should follow in order to have the most efficient and effective funding strategy. This list is not the end all and be all of how to get venture capital dollars, but will certainly help in your approach to working with VC’s.

To round this posting out, I realized that what I’ve got to say is just one side of the equation. So, I’ve asked some extremely active VC friends what they look for in a company. Raj Kappor (Mayfield Fund), Nick MacShane (Progress Partners), Brad Feld (Mobius Venture Capital), Alan Kelley (SJF Ventures), and Keith Benjamin (Levensohn Venture Partners) all have added their two cents into this article with some original answers (thank you guys very much for taking the time to do so!).

Like I said above, this list is not the end-all and be-all. Some of the items on this list may look extremely obvious, but trust me, I’ve learned over the past ten years to never assume in business. Things you take for granted in your work will sometimes be left out in others.

Ladies and gentlemen, the list we’ve all been waiting for… Things to have completed and polished before you go to a venture capitalist for financing: 

1. Executive summary & business plan are written
2. Financial model and projections are tested
3. 30 second and 3 minute pitches are polished
4. You’ve had a referral to that particular VC
5. Very strong senior management team and/or founding members
6. Starting to gain traction with your customers (vendors, customers, etc)
7. You are starting to appear in the press (or are currently already written about)
8. You’ve raised a friends/family and seed round and going for at least $1mm
9. Your business is for-profit and has a large exit opportunity
10. The market you are moving into is large enough to support a $100mm+ company
11. Customer testimonials and references
12. Your founding team and management team have no skeletons in the closet
13. Your books and paperwork are clean and filed and can move quickly thru due-diligence
14. You have put together an outline of the VC’s you’d like to approach in your geographical area and they all are being approached at the same general time (to leverage term sheets)
15. You’ve checked and made sure that the particular VC you are going to approach invests in your market
16. You’ve done due diligence prior to meeting the VC by speaking to their portfolio companies to see if the style the VC utilizes is the style that is comfortable with you
17. Your pitch team knows how to interact with each other and not step on each other’s toes during presentations
18. You’ve gone over your presentation enough to speak to it intelligently and to do it without a PPT (incase the computer doesn’t work or that particular VC doesn’t want to see it)

Some analysis of the points:
Time is money and not just for the VC. Your time as an entrepreneur is as valuable as anyone else. If you spend 15 hours courting a potential VC when it’s not really in their investment strategy to fund your company, you’ve just wasted 15 hours of building your business or raising funds from another VC.

Your founding team is crucial. Most of the time, one person cannot start a business themselves so they must rely on other proven business executives or entrepreneurs. Early on, there usually isn’t enough money to compensate them for their salary so you must convince them to come on board with equity or other compensation packages. If you cannot convince a world class founding team to join, why should a VC pour millions of dollars into your company if not one else believes in it. 

The hardest thing for an entrepreneur to understand is when they are no longer effective in the role they are playing and must step aside and let someone with more experience take over. In most cases, the founding entrepreneur is the lifeblood of the company and assumes the roll of the CEO. If the entrepreneur has little experience in this role in the past, there will come a time (70%) that they will be replaced and it could get contentious. The most effective entrepreneurs realize this and are willing to step aside and grow the business in another functional area. There are too many startups that have upset founding teams so they usually move-on after a few years. 

Even in 2006, there are still the Napkin Deals. These are the “famous deals” that get done in a steakhouse or in Starbucks where you meet with a VC early on in your companies’ history and they give verbal agreement to invest at the table with writing on the napkin. This particular type of deal is few and far between so do not get your hopes up when seeking funding.

The points above (and miniature analysis) are all from an entrepreneurs perspective, but what do the venture capitalists themselves have to say? Alan Kelley, the Managing Director of SJF Ventures weighed in with some great insight, “Venture capitalists, especially those on the East Coast, rarely feel pressure today to invest in a hot new company before customers validate market demand. Most venture capitalists believe that the risk / reward profile for investing in concepts is usually unattractive, and they know that competing venture organizations are unlikely to finance companies in their infancy.

It's a real challenge for start-up companies today to find seed capital outside of their circle of family and friends. Even angel investors often want to see traction in the marketplace before they invest.

When businesses are the end users of a new product or service, a handful of enthusiastic customers can prompt an early-stage venture capital fund to back a company. Venture capitalists tend to trust that a small sample of business customers is often representative of a larger universe. Before investing in companies with a business-to-consumer model, however, venture organizations sometimes want to see tens of thousands of users.” 

Nick MacShane, Senior Managing Director of Progress Partners talks about what he looks for in a startup. "We visit with 4-5 new companies a week. Many entrepreneurs walk through our doors are long with ideas, but short on focus, discipline and a sound understanding of how to present their ventures to the investor community. Those businesses that stand apart, and are fundable, have any or all of the following:

• a grasp on what "need" they are filling in the marketplace;
• an objective view on whether or not the team in place is the most
• appropriate to take the venture to the next level; and
• a clear, strategic and logical road map on what to do with the funds once/if they are received."

Nick makes an excellent point about what the logical road map is once the funds are received. Many entrepreneurs give the answer of, “grow the business” but that is as generic as vanilla ice cream. You need to be very detailed here as investors like to know how their money is being spent. 

For Raj Kapoor of the Mayfield Fund, it’s all about the opportunity and the team (amongst many other things). "I'm willing to invest in a startup with a great idea that requires a seed investment of under $500k up to a later stage company requiring $10M - the key is that the opportunity is compelling and that the team is superb. I'm looking for a very strong founding team as a key criteria."

Why a strong team? Because either they’ve done it in the past with another startup or they’ve worked in a corporate setting and have the knowledge of how to maneuver in tight situations and work logically. 

Keith Benjamin of Levensohn Venture Partners weighed in on the subject with a sort of opposite point of view, one of which becomes very prevalent when you send your business plan unsolicited or wonder why certain VC’s do not call you back, "With few exceptions, we do not meet entrepreneurs unless they are referred by somebody we know and respect. Ideally, an entrepreneur can find angel and seed investors with a strong network of VC contacts."

Brad Feld of Mobius Venture Capital offers up some case studies that he has blogged about on his blog, Feld.com. These are invaluable to entrepreneurs and show insight why he pulled the trigger to invest.

Why Did We Invest in NewsGator? http://www.feld.com/blog/archives/000083.html
I'm Hot on FeedBurner - http://www.feld.com/blog/archives/000343.html
My Newest Investment - Judy's Book - http://www.feld.com/blog/archives/001339.html

Conclusion
At the end of the day, it’s about execution. If you’ve got a fantastic idea, a stellar team, and have the passion and belief that you can execute on the particular startup, chances are you will succeed. Never lose sight of how important execution is and always focus on getting things. Horizontal movement is detrimental to your company, especially in the early days. As Jerry Garcia says, “Keep on Trucking” – always execute vertically and move towards your end goal. Running backs in the NFL never run horizontally because you can only score a touch down when you run straight ahead. Keep that in mind.

Fertile Soil for VCs

I've been involved in many conversations over the past few days about whether or not New York City is sustainable for digital media/technology driven startups or is the San Francisco area the only fertile ground.  My stance is/has been that New York has a thriving entrepreneurial scene and certainly is more than adequate for these types of startups.

In the nextNY group which I helped get of the ground and actively participate in, we have been discussing this topic for quite some time through our Google Group and at our monthly meetings.  Randal Stross, a writer for the New York Times recently wrote an article about how technology driven startups should exist on Sand Hill Road (or thereabouts) in order to succeed.

New York City is home to the media capital of the world and Madison Avenue.  We seem to quickly forget that many startups in the digital media world are driven by advertising dollars.  Why wouldn't you park your startup next to where the dollars are flowing in from?  I'm not saying that 100% of ad-dollars are spent in/around New York but there is certainly a heavy influence of advertising spendings from Madison Avenue.  In the Valley, you're about 3,000 miles away from Madison Avenue – away from your revenue source.

The world is becoming increasingly flat thus distance is a word of the past.  Skype, AOL IM, etc have all made communication effective and efficient.  By utilizing these resources, a company can operate from anywhere in the world and be in constant communication with it's team.  An organization today can be spread across many offices based on geographic regions or technical expertise but can be connected through and intranet and VOIP.

While venture capitalists typically follow entrepreneurial spirits to all ends of the globe there is no doubt that quite a few exist on Sand Hill Road.  Some of the top global VC's have offices here and do earth shattering deals that produce the next hottest startup. However, Sand Hill Road is not the only place where VC's exist.  New York is home to some extremely large and small firms a like including Union Square Ventures, Easton Capital, SJFVentures (their New York Office), and many others.  These VC's recognize that New York is certainly fertile for startups and are here to work with the entrepreneurs that have a strong business plan and management team. 

While Sand Hill Road has historically attracted entrepreneurs and investors, New York is certainly not to be written off.  A fantastic choice for entrepreneurs in the media and advertising industries to anchor themselves, NY offers many opportunities that many places in the world cannot.

I will admit that NY may not have the same entrepreneurial atmosphere and culture that Sand Hill Road posses but each city is it's own and we here in NY should not try and be someone else.  We have a thriving “Silicon Alley” and nextNY group that is dedicated to spreading the vibe and culture and NY will certainly put itself on the map for entrepreneurship in the not too distant future.

NYC bloggers and digital media evangelists should get together and keep promoting the start-ups here.  There is no reason why NY can't be a fertile ground... after all, NYC is the “Big Apple” and Apple's grow on trees that have been planted in fertile soil.

Great Meeting Everyone!

It was fantastic meeting everyone today at the Soy Luck Club.  We ended up talking about a range of different topics including VOIP, funding, online media exchanges, in-game advertising, next generation consoles, outsourcing, and many other topics.  We also learned that it is currently Diwali (holiday) and we were graciously treated to some delicious cookies from Ram.

This was a fantastic get together and I look forward to many more.  Maybe swing these once a month?  Thoughts?  Any feedback would be much appreciated!

Startup Mistakes

I received an IM today from a friend who works as a partner at a large Venture Capital firm who wanted to get my take on Paul Graham's posting about 18 Mistakes That Kill Startups.  Paul, one of the founders of the Y Combinator, has put together a great outline of some common mistakes:

1. Single Founder
2.  Bad Location
3.  Marginal Niche
4.  Derivative Idea
5.  Obstinacy
6.  Hiring Bad Programmers
7.  Choosing the Wrong Platform
8.  Slowness in Launching
9.  Launching Too Early
10.  Having No Specific User In Mind
11.  Raising Too Little Money
12.  Spending too Much Money
13.  Raising Too Much Money
14.  Poor Investor Management
15.  Sacrificing Users To Profit
16.  Not Wanting To Get Your Hands Dirty
17.  Fighting Between Founders
18.  A Half-Hearted Attempt

I've been through most of these issues with my startups and ones that I am consulting with.  However, I'd say that #16 (Not Wanting To Get Your Hands Dirty) and #5 Obstinacy are the most common threads that I see these days.  Many corporate executives who want to get in touch with their inner entrepreneurial self have a tough time doing all the operational work that is required with a startup.  I can't tell you how many times I've heard the phrases, "I need an assistant" or "Lets hire an analyst to do that."  Just get it done!

Obstinacy is also a big issue as many founders want to hold onto their ideas and don't want to adapt to the marketplace.  You must embrace this.  As the current teenage generation is growing up, I feel that this will be less of an issue as they are always adapting to new technologies but it is still a common theme I have seen lately with startups.   

Business Idea: Television Pilots

I’m pretty wrapped up in my current project to start something new, but have been sitting on an idea for quite some time and I believe now is the time to act upon it.  Unfortunately, I’m going to have to watch from the sideline for this one.

The idea is about television pilots.  Studios and private investors pay some serious cash to film these pilots but 99% of them sit on the shelves due to many different reasons.  Why don’t we take the catalog of these pilots and enable them over the web and allow the world to view?

This is fantastic for the television industry as the pilots are currently collecting dust in a storage warehouse somewhere and now, we can dust them off and monetize them.  The business model around these pilots would be a subscription fee, on demand fee, or advertising model. 

Remember, there is an audience for each pilot out there.  Chances are they were shelved for not building enough viewers, but at that time they were being tested, they did have at least some viewers….. 

Also, pilots were cancelled for many reasons, so there is bound to be a television pilot that is going to do very well when brought back, that it will become a prime time show.

This idea has been sitting with me for quite some time but I certainly want to see it exist in the marketplace so that’s my motivation for sharing.  Feel free to contact me if you have any questions or leave comments with your thoughts.  I’d love to hear what you think…

Odd(cast) Investment?

My friends over at Union Square Ventures (USV) have closed on an investment in Oddcast last week.  I've written about avatars in the past and I'm still extremely bullish on them.  Like I said in previous posts, they need to be portable so that different types of applications can utilize them... once this happens, then they will scale well.

I've also been seeing a few companies pop up that are custom designing avatars based on pictures that you send them.  Springwise.com today announced a service that makes cartoonish type avatars based on what you want, for about $3 USD.

Had a fantastic lunch with Sean Ryan last week of Meez and he alluded to some amazing things they are doing with their organization.  I think the avatar world is just starting to heat up... digital identities will become a big business.

Tags: oddcast, avatar, meez, custom, union square ventures, web 2.0

Entrepreneur's Chronicle

I'm a huge fan of startups, hence, my career.  One of the startups who I have been following, Riya, due to my background in technology, media, and the photo world, continues to intrigue me.  Munjal, Riya's CEO, blogs about his experiences regarding the launch of his service.  It's quite a fantastic read and I'm sure all entrepreneurs can relate to it...  You can read his posting here.

Tags:  riya, startup, entrepreneur, and photo

50 Entrepreneurial Ideas

Rob Finn of Edison Ventures has posted 50 unprioritized ideas that he believes have some weight to them.  A handful of these ideas (that I like) include:

• CRM for business development automating contact address entry, deduping, RSS creation ala Feed43
• real estate - allow people to build their own profiles/pics,maps of favorites(wist ability) and realtors can suggest homes
• org chart analytics - verify where a resume stacks up in particular company, for example VP could be reporting to a Sr VP
• email signature advertising
• mashup of all PDF documents into 1 PDF from any found on a targeted domain or found on deep web relating to content
• wedding planner niche CRM, supply chain SAAS

You can enjoy the posting of all 50 here.

Blinksale - Invoices

One of the least fun parts of business is actually sending out invoices and chasing them.  Lots of times, consultants and early stage companies don't have the capabilities (both human and software) to prepare professional style invoices.

Enter Blinksale, a company that allows you to track your invoices online as well, as send professional invoices straight to ones email box.  You can even subscribe to the invoices using ical (mac) or RSS.

Quickbooks offers the service of emailing invoices and does it extremely well.  However, there are tons of people who want to issue invoices who aren't set up with a professional bookkeeping package or don't want to make the monetary investment.

Tags:  blinksale, invoices, startup

Try Before You Buy*

I was reading Stowe Boyd's blog /Message this evening and he posted about a model used by many web companies - but most recently gootodo.  The company is irrelevant to this post, but it's a post that looks at the business model of "try before you buy... but provide your credit card first, and oh yeah, cancel your membership before the 30 day trial period is over."

I'd argue against Stowe Boyd in some context here.  I think that this business model can be correct depending upon the startup you are working with.  Lets take a vertical social network that is looking to qualify their users higher than most open social networks.  By providing a credit card, it makes the user work harder to join the network, thus eliminating many of the unwanted low value registrations.

To the point where Stowe talks about how the user must contact the company to make sure their credit card isn't charged... I agree and disagree with him.  Many adult websites (not that I visit them) actually have this model as a good % of registrations forget about their registration within the first 30 days.  This is a way that companies can generate some revenue (users forgetting).  Another reason why this model isn't so bad is that it makes the user give more to the community/site/organization, which in turn, should lead to a much more invested experience and the switching cost becomes higher.

Just a few thoughts - would love to hear yours.

Tags:business model, marketing, stowe boyd, gootodo

Great Resource: Startup School

It's a gorgeous Sunday morning and I'm in the West Village at the Soy Luck Club enjoying a nice mint chocolate soy steamer and a banana soy butter pressed bagel.  The sun is shining and I'm doing my weekly research about startups, media, and technology.

I stumbled upon the "startup school wiki".  There are some excellent presentations in PPT format that discuss the entrepreneur mentality, case studies and the needs of a financial background in a startup.  I highly suggest even clicking through the site even if you do not read it.

For someone dealing with Venture Capitalists and "deal terms" and are lost in the terminology, check out the funding area where it explains all of the terminologies and what to look for.

Technorati Tags: startup, funding, investment, seed capital, web 2.0, and VC

Tips For Raising Angel Capital

Raising angel capital can be a daunting task for an entrepreneur as it is often the first time the entrepreneur goes to the market for fundraising.  Since the market is much smaller than institutional investors, it's often hard to locate and qualify the right people for your capital raising needs.  A recent blog post by Guy Kawasaki outlines much of the processes and tips that any entrepreneur should read before going down the angel fund raising path.

Two major points that I should reiterate from Kawasaki's posting are to make sure that the investors are sophisticated and that your story/pitch is simple enough that your spouse can understand it.  When you are going to raise later rounds of funding (if you go down that path), your Series A investors will probably want to know who your seed investors are.  If you have quality seed investors (angel), you will make the Series A investors feel a bit more comfortable.  As for selling your idea to your spouse - it's important.  If they can't understand it, an angel investor who may not be in the finance industry or industry you're within will never understand it.  The goal here is not to raise just money, but raise money from folks who get your idea and who know who the right people are to help you advance your idea further down the line.  Not only are you getting Angel Capital here, but you're getting advisory capital.

Technorati Tags: angel capital, funding, investment, seed capital, and VC

Silicon Alley Back?

I've been to 3 networking events in the past 96 hours here in NYC and have to say that the amount of companies hiring is on the rise.  I've been receiving an increasing number of job descriptions across my desk in the past few weeks and have to say that this is starting to feel like 1998 and it's extremely refreshing. 

With the increasing hiring - salaries will go up, perks will start to kick in, and the stories will begin...again.  I think everyone in New York City knew who Herman Miller was - due to their extremely popular (and still is!) Aeron chair.  This >$800 chair was the quintessential throne for anyone working in a technology/media company.  Are they coming back into fashion?

For recruiters and HR execs, the hard part is not finding the talent in the marketplace.  Rather, it's about keeping the talent at a company.  We've all heard Google's "perks" such as free meals, dry cleaning, Naked drinks, etc - they do a great job retaining people.  With new jobs increasingly opening up here in NYC, companies are going to have to work harder than ever to keep their employees so they don't jump ship to the next hottest start up or media company. What will these perks be?  I'm looking forward to monitoring this....

Where's the next Silicon Alley?

nextNY Networking

I was invited by a friend at Union Square Ventures this evening to take part in a networking event down on Hudson Street here in Manhattan to meet top entrepreneurs, media folks, investors, and movers/shakers here in the city..... all under 30 years old.  I'm sure there were a few people well over 30, however, I was delighted to see many peers within the same age bracket.

I met some great people from Seamless Web, Warner Music Group, RadioTail, Rave Wireless, Vantage Point Venture Partners, and Venture Voice...amongst many other amazing folks.  One of the feelings that I received from talking to people was that Silicon Alley is back.  When I was working at i33 Communications back in the day, we were in the heart of Silicon Alley.  Now, I'm not sure where it exactly is (downtown, uptown, Union Square, Flatiron District, etc) but it is here.... I met about a dozen folks who moved to NYC recently to work in media and/or technology.  This reminds me of the "job-rush" of moving out to San Jose/San Francisco of the late 90s.

I am looking forward to continuing conversations with the folks I met this evening, and if I didn't get around to chatting, I apologize but I look forward to the next exclusive mixer.