Gary Edwards's List: Entrepreneur

• Launching the iFund Blog….

   Posted by Matt Murphy, September 15th, 2008 at 3:54 am   

   

  Today we’re launching the iFund blog. The purpose is to share (and hear) perspectives around the iPhone and emerging open mobile ecosystem. We’ve been blown away by the amount of entrepreneurial activity in mobile since launching the iFund on March 6th. In 6 months, we’ve received over 2700 plans. To put it in context, that’s about 20x what we received in a similar period last year. Out of that group, we’ve funded five companies totaling more than $30M of investment

• two reasons: they understand your situation, and they're a source of contacts and advice.
• The contacts and advice can be more important than the money.
• the concept of exit strategy
• Another concept we need to introduce now is valuation.
• Some angel investors join together in syndicates.
• One of the dangers of taking investment from individual angels, rather than through an angel group or investment firm, is that they have less reputation to protect.
• What kind of anti-dilution protection do they want?
• Fair or not, investors do it if you let them. Even VCs do it. And funding delays are a big distraction for founders, who ought to be working on their company, not worrying about investors. What's a startup to do?
• The key to closing deals is never to stop pursuing alternatives
• Seed Funding Firms
• Seed firms differ from angels and VCs in that they invest exclusively in the earliest phases—often when the company is still just an idea.
• seed investors usually care less about the idea than the people. This is true of all venture funding, but especially so in the seed stage.
• Seed firms and angel investors generally want to invest in the initial phases of a startup, then hand them off to VC firms for the next round. Occasionally startups go from seed funding direct to acquisition, however, and I expect this to become increasingly common.
• Venture Capital Funds
• In a sense, the lower-tier VC firms are a bargain for founders
• Better how? The most obvious is valuation: they'll take less of your company.
• Another danger of less known firms is that, like angels, they have less reputation to protect.
• lower-tier firms are much more likely to pretend to want to do a deal with you just to lock you up while they decide if they really want to.
• It's the partners who decide, and they view things with a colder eye.
• Because VCs invest large amounts, the money comes with more restrictions.
• Another difference with large investments is that the founders are usually required to accept "vesting"—to surrender their stock and earn it back over the next 4-5 years.
• Every startup's rule should be: spend little, and work fast.
• prototype
• skeleton business plan, addressing the five fundamental questions
• An angel investing $200k would probably expect a seat on the board of directors. He might also want preferred stock, meaning a special class of stock that has some additional rights over the common stock everyone else has. Typically these rights include vetoes over major strategic decisions, protection against being diluted in future rounds, and the right to get one's investment back first if the company is sold.
• vesting is also a way for founders to protect themselves against one another. It solves the problem of what to do if one of the founders quits. So some founders impose it on themselves when they start the company.
• The one universal rule is that the amount of stock an employee gets decreases polynomially with the age of the company. In other words, you get rich as a power of how early you were.
• Step 3: Series A Round
• Due diligence is the corporate equivalent of a background check: the purpose is to uncover any hidden bombs that might sink the company later, like serious design flaws in the product, pending lawsuits against the company, intellectual property issues, and so on. VCs' legal and financial due diligence is pretty thorough, but the technical due diligence is generally a joke.
• Deals Fall Through
• But the most unrealistic thing about the series of deals I've described is that they all closed. In the startup world, closing is not what deals do. What deals do is fall through.
• Partly the reason deals seem to fall through so often is that you lie to yourself.
• The reason is that it's such a risky environment.
• Consulting is where product companies go to die. IBM is the most famous example.
• full ratchet anti-dilution
• So it's worth negotiating anti-dilution provisions, even though you don't think you need to, and VCs will try to make you feel that you're being gratuitously troublesome.

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• Web User Groups in the Silicon Valley and San Francisco Bay Area

• In a teleconference with reporters, the Founders Fund partners alluded to "bad deeds" of other VCs but shied from specifics.

    "There have been all kinds of situations with very, very complicated deal structures, where (venture capitalists) are trying to extract as much as possible from a pie, as opposed to growing a larger pie," said Peter Thiel, former chairman and chief executive at Paypal and a director at Facebook. The goal, he said, is to create "less of a zero-sum game."

    The Founders Fund partners said the new stock formula would reduce tension between entrepreneurs and VCs by more closely aligning their abilities to achieve liquid financial returns.