Recently in Startup Lessons Category
"John Osher has developed hundreds of consumer products, including an electric toothbrush that became America's best-selling toothbrush in just 15 months. He also started several successful companies, including Cap Toys. He built sales to $125 million per year and then sold the company to Hasbro Inc. in 1997. But his most lasting contribution to the business world just may be a list of screw-ups he jotted on the back of a piece of paper.
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Read the full list of the screw-ups at 17 Mistakes Start-Ups Make.
Read the full list of the screw-ups at 17 Mistakes Start-Ups Make.
This brilliant cartoon caught my eyes in a blog post wine as commodity:
Poetic, mystical, and at the same time very true about the world of business. My friends know my motto (which is shamelessly stolen from the title of a book): Differentiate or Die!
Poetic, mystical, and at the same time very true about the world of business. My friends know my motto (which is shamelessly stolen from the title of a book): Differentiate or Die!
The founder of Meetro tells us the story of why the startup failed:
Anatomy Of A Failure: Lessons Learned
Anatomy Of A Failure: Lessons Learned
Here's full coverage of the 2008 Y Combinator Startup School:
http://www.justin.tv/hackertv/97554/Startup_School
The vide gets jittery sometimes and there are skips, but it's usable. A better version (but it's not complete at this point - will take time to finish) can be found on Omnisio which syncs videos with the slideshow of the presentation, so it's much nicer. Also the questions from the audience are captured and captioned on the video:
I can tell you from experience that most of what you see in this article is good advice, so it's a good quick read. I would also add two things: Most of VCs look at the team very closely - even when you present and how you interact with each other - and also they want a go to market strategy. See my other post on the subject.
For most of web start ups the technology component is the easiest part. Usually founders, specially first-time founders, are too distracted by proving that they can build a technology that works. Don't get me wrong, that's very important. However, since we are talking about engineering work getting there is much more manageable. Specially if you're coming from a similar background and have built similar products before, the risk of building the product is usually low. Scaling it is more tricky, but let's leave that for another post. Again if you have been in an environment that needed scalability you know the tricks. What I'm saying is that in the big scheme of things, the engineering part is usually easy (unless you're doing something that needs inventing new algorithms or things along those lines).
The biggest challenge a web start up has is acquiring users. Without users technology does not matter. It is easy to "assume" that you can get 300,000 users in the first year because flickr could do it or delicious could do it, but it's easier said than done. Depending on the nature of your service (how viral it is), clarity of your messaging (how easy you can communicate to the user why they should use your service), your business model (do you charge your users or you provide a free service supported by ads, etc), and the demographics of your users (who's the target of your application) things can be very different and very undeterministic as to how you get users and how your user base grows.
That's why as an entreprenuar you need a "go to market strategy". And that strategy cannot be "I'll hire a VP of marketing to figure that out". If you are starting a business you should be more than an engineer. You should have a sense of why people should like your service and how you get the word out, and who's the right audience.
You need to think and document how you want to get the first, say, 1000 users, and how you want to grow it to 2000 users, 5000 users, and 10,000 users. If I were an investor and you were pitching to me, I would be very interested to know how you get up to the 50,000 user mark. If you get there then hopefully a VP of marketing can help you grow it more. Otherwise your technology might be nice, but it does not build a business.
Since this part is not engineering work and is not exact science it's very hard. That's why it's a big challenge, so give it time and think about it. Imagine you have your product ready and, say, 100 users who are your friends who were kind enough to listen to you and try your service. What's next? That's the big question.
The biggest challenge a web start up has is acquiring users. Without users technology does not matter. It is easy to "assume" that you can get 300,000 users in the first year because flickr could do it or delicious could do it, but it's easier said than done. Depending on the nature of your service (how viral it is), clarity of your messaging (how easy you can communicate to the user why they should use your service), your business model (do you charge your users or you provide a free service supported by ads, etc), and the demographics of your users (who's the target of your application) things can be very different and very undeterministic as to how you get users and how your user base grows.
That's why as an entreprenuar you need a "go to market strategy". And that strategy cannot be "I'll hire a VP of marketing to figure that out". If you are starting a business you should be more than an engineer. You should have a sense of why people should like your service and how you get the word out, and who's the right audience.
You need to think and document how you want to get the first, say, 1000 users, and how you want to grow it to 2000 users, 5000 users, and 10,000 users. If I were an investor and you were pitching to me, I would be very interested to know how you get up to the 50,000 user mark. If you get there then hopefully a VP of marketing can help you grow it more. Otherwise your technology might be nice, but it does not build a business.
Since this part is not engineering work and is not exact science it's very hard. That's why it's a big challenge, so give it time and think about it. Imagine you have your product ready and, say, 100 users who are your friends who were kind enough to listen to you and try your service. What's next? That's the big question.
Starting a company has many challenges including funding. Even for web start ups where you don't need a whole lot of money typically a seed of $200K-$300K is needed to build a first release and get to the point that you can get your first round of users to do a beta test.
One common questions for entrepreneurs is whether to get a loan or go to a VC. VC money is "smart" money (assuming you go to the right VC and you can actually convince them to give you the money), but even if we set aside all the known and unknown issues of dealing with VCs there is one huge issue when you want to get your company off the ground: Valuation. If you go to a VC to seed your company without a product and/or some sort of user traction there is no way of getting a good valuation. You have to let go of a big chunk of your company.
The Y Combinator model is interesting and is worth looking at for new companies, because they have good connections, they do not take half of your company, and they do not ask for outrageous rights VCs typically want. But the amount they invest is very limited and might not be enough for what you are trying to do.
So a common approach is to take a "bridge loan", which delays determining the valuation. Basically you take the money, you build your product (or part of it), if you're lucky you can even get some traction, then you go for your series A, and at that time you are in a better position to negotiate a meaningful valuation. The loan amount will now be converted into series A preferred shares, just like the VCs financing the round, usually with some discount to recognize the risk lenders took to give you money earlier. That's why this is also called a "convertible note".
You can find some good details about the process and what you should consider here.
One common questions for entrepreneurs is whether to get a loan or go to a VC. VC money is "smart" money (assuming you go to the right VC and you can actually convince them to give you the money), but even if we set aside all the known and unknown issues of dealing with VCs there is one huge issue when you want to get your company off the ground: Valuation. If you go to a VC to seed your company without a product and/or some sort of user traction there is no way of getting a good valuation. You have to let go of a big chunk of your company.
The Y Combinator model is interesting and is worth looking at for new companies, because they have good connections, they do not take half of your company, and they do not ask for outrageous rights VCs typically want. But the amount they invest is very limited and might not be enough for what you are trying to do.
So a common approach is to take a "bridge loan", which delays determining the valuation. Basically you take the money, you build your product (or part of it), if you're lucky you can even get some traction, then you go for your series A, and at that time you are in a better position to negotiate a meaningful valuation. The loan amount will now be converted into series A preferred shares, just like the VCs financing the round, usually with some discount to recognize the risk lenders took to give you money earlier. That's why this is also called a "convertible note".
You can find some good details about the process and what you should consider here.
We have all heard about why VCs look for 10x return and how most of their investments fail or underperform (hence the need for the 10x home runs). Fred Wilson of Union Square Ventures has published two blog posts which contains an analysis of the startups he has invested in as a partner - 32 investments over 17 years.
First of all notice that it's not 320, it's 32. So we're talking 2 new investments a year. This is in line with most of other VCs I have heard from (about 2 deals per year per partner). They receive a lot of business plans but select only a few. Usually the partner involved takes a seat in the board of directors of the company, and these accumulate over the years - if the average life time of a company through exit is four years, the partner ends up on some eight boards.
In failure rates in early stage deals, he shares some numbers in terms of what he thinks (and promises to VC investors) in terms of success/failure rates, and what his performance shows (he has done great, by the way). He counts on 5x-10x in 1/3 of the companies he invests in, complete loss on another 1/3, and another 1/3 in between (doing ok, but no considerable ROI).
Personally I find the second post, why early stage investments fail, even more interesting. Notice that this is not "why early stage startups fail". In fact of the two reasons he gives, the second mostly applies to companies beyond their early stage.
He talks about two main reasons: 1) VC realizes it's not a good idea and kills the investment. 2) Idea is good but grows too soon, i.e., it gets overfunded and burn rate goes high before they realize how to scale the business.
He then goes into more details on the second reason, which is what I really liked about the post. I have seen this first hand. He sys most of the time the business plan is flawed in the beginning, and the companies have to transform themselves as they are executing to make sure they finally find the right business plan. In his words: "Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business."
Again he shares some data - of his investments, within the ones that did 5x or more, 7 transformed, 4 did not. Of the failed ones, 1 transformed, 4 did not. Interesting, eh?
First of all notice that it's not 320, it's 32. So we're talking 2 new investments a year. This is in line with most of other VCs I have heard from (about 2 deals per year per partner). They receive a lot of business plans but select only a few. Usually the partner involved takes a seat in the board of directors of the company, and these accumulate over the years - if the average life time of a company through exit is four years, the partner ends up on some eight boards.
In failure rates in early stage deals, he shares some numbers in terms of what he thinks (and promises to VC investors) in terms of success/failure rates, and what his performance shows (he has done great, by the way). He counts on 5x-10x in 1/3 of the companies he invests in, complete loss on another 1/3, and another 1/3 in between (doing ok, but no considerable ROI).
Personally I find the second post, why early stage investments fail, even more interesting. Notice that this is not "why early stage startups fail". In fact of the two reasons he gives, the second mostly applies to companies beyond their early stage.
He talks about two main reasons: 1) VC realizes it's not a good idea and kills the investment. 2) Idea is good but grows too soon, i.e., it gets overfunded and burn rate goes high before they realize how to scale the business.
He then goes into more details on the second reason, which is what I really liked about the post. I have seen this first hand. He sys most of the time the business plan is flawed in the beginning, and the companies have to transform themselves as they are executing to make sure they finally find the right business plan. In his words: "Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business."
Again he shares some data - of his investments, within the ones that did 5x or more, 7 transformed, 4 did not. Of the failed ones, 1 transformed, 4 did not. Interesting, eh?
I liked 5Min the minute I saw it about five months ago. I could see that its viral aspects are pretty good, making it a self-marketing web site. I'm glad to hear that they got their series A and raised $5M.
The above mentioned TechCrunch report has something much more interesting though - the cap table of the company prior to doing the series A round, which I'm showing here right from the TechCrunch report.
Cap table is almost always confidential information for private companies, so having a chance to look at some company's cap table is always interesting.
Founders are Tal, Ran, and Hanan. As you can see the founders collectively owned 52.1% of the company prior to series A. I don't know how many seed rounds they had (their site only mentions one "seed" funding of $300K), but it looks like the founders were not good at negotiating the valuation.
As a rule of thumb, founders would be at about 50% (give or take some, depending on negotiation powers) after series A. Of course if you're a super-hero founder with a solid track record of building companies things are different, but for the first timers that's pretty much what happens. Series A is usually considered the most diluting round. So if you're founding a company, you have to either make your valuation high enough or raise less angel funding, so that you're still roughly at about 80% ownership. Otherwise by the time of series A (and usually a series B is inevitable) there is not much left. In the case of these guys most probably now that they have got their series A they are at about 9% ownership each (Hanan even less), and by series B they'll be at about 6% (these are just guestimates of course, but that's what an entrepreneur should do anyway and do the math to reverse engineer and see what makes sense). If we assume a $50M exit for these guys, 6% after all the conversation multiples and other stuff will make a founder about $2-3M. Not bad, but not impressive either.
The above mentioned TechCrunch report has something much more interesting though - the cap table of the company prior to doing the series A round, which I'm showing here right from the TechCrunch report.Cap table is almost always confidential information for private companies, so having a chance to look at some company's cap table is always interesting.
Founders are Tal, Ran, and Hanan. As you can see the founders collectively owned 52.1% of the company prior to series A. I don't know how many seed rounds they had (their site only mentions one "seed" funding of $300K), but it looks like the founders were not good at negotiating the valuation.
As a rule of thumb, founders would be at about 50% (give or take some, depending on negotiation powers) after series A. Of course if you're a super-hero founder with a solid track record of building companies things are different, but for the first timers that's pretty much what happens. Series A is usually considered the most diluting round. So if you're founding a company, you have to either make your valuation high enough or raise less angel funding, so that you're still roughly at about 80% ownership. Otherwise by the time of series A (and usually a series B is inevitable) there is not much left. In the case of these guys most probably now that they have got their series A they are at about 9% ownership each (Hanan even less), and by series B they'll be at about 6% (these are just guestimates of course, but that's what an entrepreneur should do anyway and do the math to reverse engineer and see what makes sense). If we assume a $50M exit for these guys, 6% after all the conversation multiples and other stuff will make a founder about $2-3M. Not bad, but not impressive either.
