Lighter Capital recently published a guide on how to choose the best funding path for your startup. It is pretty informative and outlines three funding paths that are potentially open for a tech startup. I find the guide particularly useful as less then 1% of all companies attract venture funding and it seems that nearly 100% of entrepreneurs seek out venture capital. Most companies do not raise venture funding and most entrepreneurs should not seek it.
There is a nice graphic in the guide that sums up three funding paths.
I don’t agree that companies generally raise a series A at launch and initial traction or that a series B takes place at $5 million in revenue. They both seem to come later to me.
The important takeaway from this chart is the non VC-backed path and revenue based financing. It is the path that the vast majority of startups will take and one that entrepreneurs should spend more time thinking about than pursuing venture capital.
After my post last week on Atlanta cracking the top ten in terms of regional startup capital first fundings Adam Harrell of Startup Atlanta reached out to me with other signs of the Atlanta startup ecosystem gaining traction and shared his 2015 State of the Atlanta Startup Ecosystem with me. It is embedded below.
Most notable are that Atlanta was ranked 10th in acquisitions from 2012 – 2104, and 10th on venture capital investment based on dollars invested.
The presentation is full of progress made in 2014 and bodes well for the future.
When David Cummings started Atlanta Tech Village his stated vision was to help make Atlanta a top ten tech startup city. We may be well on our way.
Ian Hathaway of the Brookings Institution recently published an article entitled “Early-stage venture capital: More regions get in on the action“. Interesting summary of what Ian calls “first fundings” or initial round of professional venture investments in 2014. I played around with the results table a bit, basically consolidating areas like San Francisco/San Jose and Boston/Cambridge. The resulting metro rank and number of deals per area is below.
1 San Francisco 630
2 New York 319
3 Los Angeles 160
4 Boston 150
5 Washington DC 69
6 Seattle 67
7 Austin 58
8 Chicago 56
9 San Diego 48
10 Atlanta 39
Atlanta has cracked the top ten in terms of regional concentrations of early-stage capital in the United States. Granted there is still a huge concentration of capital going to the Valley. There always will be. But I think we are starting to see the results of David’s vision, being carried out by lots of different entities across the entire Atlanta metro area.
Mark Suster recently put up a video of a discussion that he had with Jeff Clavier on the lessons learned from Fab. It is embedded below.
In a nutshell they believe Fab paid too much attention to competition and did not stay focused on their core market market. Around the 3:20 mark things get really interesting when Mark starts talking about capital constraints. Capital constraints force focus, force creativity, and force innovation. Capital constraints also force you to ask harder questions about the viability of the business. Mark concludes that Fab’s issue was overcapitalization.
In his and Jeff’s point of view raising a large amount of capital increases investor expectations which in turn forces artificial growth and raises public expectations. The end result being growing too fast before a strong foundation is in place. Then things crumble.
Something to consider when big checks with high valuations are becoming more common.
Something that is garning a few headlines these days in the tech world is the Ellen Pao discrimination lawsuit against Kleiner Perkins. Pao is seeking $16 million in damages. Liz Gannes of Re/code has been live blogging the proceedings and for those with any interest in the inner workings of venture capital it’s fascinating.
The past two days John Doerr has been on the stand. Doerr is without question one of the most successful venture capitalist over the past 20 years or so. He funded companies like Compaq, Netscape, Symantec, Amazon, Intuit, and Google.
During a jury witness Q&A period with Doerr Judge Harold Kahn posed a question of his own. How do you learn to be a venture capitalist? When pressed Doerr said the following.
My advice to people who want to be in the venture capital industry is to forget about it. To go be a successful entrepreneur. To have the experience of having to lay people off because you can’t make a payroll. That’s not something you can learn in a class. Once you have that
experience, I think you should apprentice yourself to a successful venture capital firm. You should read the business plans. You should see how venture capital firms conduct themselves, how they give clear answers. And the hardest thing of all is to become a good judge of what makes a good entrepreneur or good CEO. So you develop a sort of pattern matching of what works. And you should seek mentorship.”
While Doerr seems to believe that venture capital is an apprenticeship trade and people read business plans the most fascinating aspect of his entire testimony is that as one of the most successful venture capitalists ever he is telling people that want to get into venture to go start a company, make it successful, and then get taken under someone’s wing. It may to be the traditional path but I am not sure that is the most common path these days. People that start and lead successful companies generally don’t like people telling them what to do. It’s part of the reason why there is an emergence of so many new venture funds.
So TechCrunch Pitch-off made its way to Atlanta the other night. The best thing to come out of that was not the event itself but an article by Christine Magee chock full of CrunchBase data. The most interesting of which was a chart of the most active investors in Atlanta based startups since 2010. Not sure exactly how accurate this data is, let’s just assume it is Neilson correct, but there are some interesting tidbits to take away from it.
First and foremost BIP and BLH have been busy with a capital B. I am in the BLH office quite a bit and there are always people coming and going. Ashish is placing lots of bets. It turns out so many the firm is one of the most active in Atlanta over the past five years.
Another thing that surprised me is that eight of the ten firms listed are based in Atlanta. I would expect a bit more of an out of town presence given how entrepreneurs go fund fishing on the coasts. Perhaps the takeaway is to fish in your hometown.
It’s also nice to see Hallet Capital on the list. Jon is a silent type down to earth A team baller. All he does is deals. Successful ones.
Five years from now it will be worth looking back and doing a comparison with this list. There is a new wave of investors formed in the last year or so like Atlanta Venture, Mosley Ventures, Tech Square Labs, and Tech Square Ventures that due to their life cycle did not make the top ten cut this time around. My bet is that a few of them will be by then.
Fred Wilson went on a little tweetstorm yesterday on the subject of startup ideas and if he thought they were good. It was something that I could really relate to from my days at ATDC. Entrepreneurs always wanted to know what I thought of their idea. I agree with Fred’s premise that “it doesn’t matter if I think it is good” for a slightly different reason.
His point of view is that the entrepreneur needs to think it is a good idea. While I generally agree with this I believe there is one thing more important. The people that would buy your product/service need to think it is a good idea that solves a problem they have. Whenever an entrepreneur asks me if their concept is a good one I would ask this question. It does not matter what I think, what do your potential customers think? More often than not they would not know the answer.
Know the answer.
I have been a believer in net neutrality for nearly 20 years. These days it seems there is a lot of differences of opinion on if it is a good thing or not. I believe that it is good. I believe this because the concept of non-discrimination is one of the core tenants that has made the Internet successful. If you don’t believe in net neutrality you believe in discrimination in an internet network sense. Discrimination is bad.
The Internet as we know it is based on the concept of non-discrimination. Non-discrimination can be generally thought of as meaning there is no difference between the price of transmitting packets based on the identity of the transmitter, the identity of the receiver, the application, or the content that a packet contains. You as a consumer subscribe to an ISP at some rate and they deliver packets to you according to your service plan. It does not matter if that packet contains a voice call, an email, an image, a video or the text of this comment. A packet is a packet regardless of the payload it contains.
Prior to 2005 Internet communications were subject to the same rules as common carrier telephone companies which included non-discrimination requirements. In 2005, in a move I believe was related to AT&T’s repurchasing many of the Ma Bell’s and Verizon hooking up with MCI, the FCC changed the classification of Internet access from being a telecommunication service to being an information service.
This changed opened up the door for ISPs to abandon non-discriminatory pricing and that is what ISPs want to do. ISPs not only want to charge you as a consumer to deliver packets to you. They want to charge the originator of the content a fee as well.
Where I lot of people get hung up, and ISPs want them to, is that they believe the content producer is getting a free ride. This is not the case. Content originators pay an Internet backbone provider, a commercial ISP, or some type of cloud service to move their content from the point of origination to the ISP that then carries the content to the termination point.
The FCC always has been and always will be involved in the governance of Internet access in the USA. What the FCC is currently proposing is reclassifying Internet services back to the same common carrier status that they had prior to 2005 (FCC fact sheet). I support this because the concept of non-discrimination is an important foundation of the success of the commercial Internet. If that foundation goes away the end result is going to be less choice, less competition, and higher prices for you and me.
It may seem that I am being master obvious but all startups need to start small. More often than not startups want to start big. Creating a very broad product that addresses the needs of a large market with a diverse set of needs. Doing this as a startup is a failing strategy. Two things yesterday reminded me of this.
I went to lunch with the co-founders of SalesLoft. During lunch Kyle Porter recounted a meeting he had with Charlie Paparelli. Kyle told me that Charlie had him draw up something like the below on a white board.
The horizontal line labeled market represents the size of the total market that a startup could address. A startup does not have the resources to address the entire market so it needs to focus. Focus on a single point in the market that is by definition small. Once you enter and control that point in the market you can expand your offers into the wider market.
Last night I continued to make my way through Zero to One by Peter Thiel. I got to the point in the book where Thiel writes about building monopolies. Here is one of his thoughts on the subject.
Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.
Paparelli and Thiel agree on this point and I agree with them. The best way to start a startup is to focus on a small portion of the total market with a concentrated group of initial potential customers that have the same needs that are not currently being met by any competitors.
In the last of my MindSpring throwback video posts we have Charles Brewer on guitar. I believe that these sessions were taped at one of the company’s all hands meeting in Q1 of 1997 shortly after we became profitable. The first song is called “Profit.” I am not sure what song it is based on. The second is simply “MindSpring” sung to the tune of The Trogg’s “Wild Thing.”
When I first met Charles he was romping around with a three legged dog and a pager throwing a frisbee in Piedmont Park. I thought he was a little odd. When you are the CEO of a public company that prepares sing alongs for company meetings I suppose you are eccentric.