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Who Wants Seed Money?

Aug 03, 08 in Angels, Entrepreneurship, Startups   15 Comments

The comment stream generated by the word "discuss" in my quote of the week Friday is simply amazing.  The quotes are not that important.  Read the comments.  Some really good stuff in there.

Several of the comments pointed out the need for a seed stage investment company like Y Combinator in the Southeast.  I was a bit surprised that no one mentioned the previous efforts to create such entities in Atlanta.  There are two.  Boostphase, which Stephen Fleming, Wayt King, Keith McGreggor, myself, and others attempted to form last fall.  And Profounder (that has a slightly different model) which was put together by Merrick Furst this year and in which I am involved.

So the comments got me thinking.  Is it time to try and wind up Boostphase again from an angel perspective and do we have enough entrepreneurs in the Southeast, to quote Wei, to take a shotgun approach.  So I am interested in knowing how many of you entrepreneurs out there believe you can answer the following questions, pulled straight from the YC application, in a compelling way.

What is your company going to make?

Please tell us about an interesting project, preferably outside of class or work, that two or more of you created together.  Include urls if possible.

How long have the founders known one another and how did you meet?

What's new about what you're doing? What are people forced to do now because what you plan to make doesn't exist yet?

What do you understand about your business that other companies in it       just don't get?

How will you make money?

How long will it take before you have a prototype? A beta? A version you can charge for?

If we fund you, which of the founders will commit to working exclusively (no school, no other jobs) on this project for the next year?

And if you can answer the questions in a compelling way, would you accept a deal where you got $25K and some expertise on how to get your concept to the angel/VC/buyout stage for 5 - 10% of your company?

I am going to try this one more time.

Discuss.

Comments

I had kind of heard of BoostPhase and Profounder, but I'm skeptical of attempts like that until they start seriously talking about taking applications and funding. I understand that it takes a lot of time to raise money and organize the structure that a YC clone necessitates, but forgive me for not taking those entities seriously until they actually manifest themselves.

I can answer all of those questions, and I would definitely consider that kind of offer. My product is kind of mature right now and has other specific encumbrances that might not make it a good fit for such a program.

But, 6 months ago? 2 years ago? My answer would have been "Hell Yes!" It was exactly because of the lack of a local program like this and my decision to stay in Atlanta that I chose another path- pretty much the only one available to me which would get me to where I wanted to be in a year or less.

(I hate talking vaguely, but you never know how much you can actually disclose at a stage like this.)

Erik Peterson  |  Aug 03, 08 at 09:34 AM

Vague is good and all I expect in a venue like this. Annon would even be better than nothing.

Lance  |  Aug 03, 08 at 09:50 AM

I got way too deep in the hole financially with my last startup to be in a position to accept an offer like this just now, but I applaud this post.

Russell Jurney  |  Aug 03, 08 at 08:19 PM

I have never fully bought into the YC model as something I'd do, but it has proven itself elsewhere, and Atlanta's current models are underperforming, so I'd certainly encourage trying this model here.

I could answer most of these questions nicely, and want to emphasize that to me, the $25k is nice, but the "some expertise" is the critical part. Especially in Atlanta, giving entrepreneurs access to experienced, savvy veterans who can help them both in their business and in navigating the connections they need in Atlanta, is worth much more than $25k.

One of Atlanta's proven models is to be involved in a successful startup, and start something new with some of your colleagues. Funding is easier to come by, but for your typical developer or business person who hasn't worked their way up to the executive level, this is somewhat of a crap shoot, given their limited ability to be successful. The YC model helps folks with more ideas than patience/luck to short-circuit this model and start building their company. I think the prevalence of this model in Atlanta has discouraged many people from starting companies here, because they haven't hit jackpot yet.

The other model that is being tested here in a big way is bootstrapping past the seed and perhaps even angel stages. As you've suggested, Lance, many of the companies people want to start could be brought to prototype with the hands of a competent technical co-founder for far less than $25k. I've also stated that part of the problem here may be that entrepreneurs do not have faith that the angel or venture funding will be here to support them when they are ready for that funding. A YC model can help solve this perception by easing the process of making the right connections.

Someone make sure this post gets circulation down on the flats of Georgia Tech once Fall semester kicks in.

Rob Kischuk  |  Aug 03, 08 at 11:08 PM

For me, I'd like to have the ability to work with other really quality people who all have the internal motivation to succeed. My last venture I was able to bring on a few key people who were very good and we saw significant success for many years but even those where not CXO level people. I would almost kill to work on a first rate team of 4-5 people. Well, I guess that's where my last 2 years is prepping me to met and get to know those kind of people!

I question the $25k being enough to allow someone to work full time for a year *and* pay even basic reasonable expenses. That said, I see a workable model coming out of all this discussion just not 100% sure what it will be yet. :)

Mike Schinkel  |  Aug 04, 08 at 02:34 AM

While I wouldn't be opposed to give up 5-10% of equity for $25k, I think I'm teetering on the edge where I may or may not need that level of support in the foreseeable future.

With that said, I do envision a co-working environment where it's part Y-Combinator and part what Mike described.

For the few companies that just started, it would be a great experience for them to be propelled on a fast track for 3-4 months where educational seminars would teach them various things as well as get the startups connected. $25k won't last a year, but the goal of the investment and push is so they can complete what they need to in a few months instead of taking a whole year without any support.

For the rest of us, it'd be great if we can simply work along side them in exchange for being subject experts on various topics whether it'd be programming, debugging, marketing, PR, networking, etc. Many of us have experience in different areas and if we can help each other out through talking about our experiences, more startups will end up doing more "right" things than repeating the same, stupid mistakes.

Wei Yang  |  Aug 04, 08 at 11:20 AM

Whatever form it takes, one thing I think it needs to do is bring in new investors, not just try and recruit from the same pool of investors that ATA, et al, do. I know Stephen hates the "cap table with 20 orthodontists" but I think YC/BoostPhase/Profounder would work a little better if it widened its investor pool into the "franchise/commercial real estate" crowd.

Michael Mealling  |  Aug 04, 08 at 11:57 AM

"I question the $25k being enough to allow someone to work full time for a year *and* pay even basic reasonable expenses. That said, I see a workable model coming out of all this discussion just not 100% sure what it will be yet. :)"

That's why I think this would be better geared towards recent GT grads with technical talent looking to do the startup tango with local entrepreneurs, like Rob mentioned. There are a lot of GT students that don't know what to do with their skills. If there was some type of program to join them with entrepreneurs and business folk, lots of startups could get off the ground in ATL.

Slightly related, I think we need to find some great office space near GT/midtown and get 50 people or so to pay a monthly fee and use it as co-working space. It could be the new hangout of the ATL tech scene...

Paul Stamatiou  |  Aug 05, 08 at 06:54 PM

So one of my takeaways from these responses is that there is no desire by Atlanta area entrepreneurs to have a YC type model because the $25 offered (for up to 4 founders BTW) to work in the program for 12 weeks full time and commit to working on the project for a year is not attractive. Do I have this right?

Lance  |  Aug 06, 08 at 09:24 AM

Lance, I don't think it is wise to extrapolate from this small of a sample size. I think that the audience on this particular blog has been at the startup game for a couple of years, and subsequently have moved beyond the YC stage.

There are definitely, DEFINITELY, lots of entrepreneurs out there who would jump at the chance. We just don't know where they all are.

But judging from the responses, I think what might be less risky, easier to setup, and a good starting point for the above would be a co-working program. Something that isn't centered on money, but would provide all the advantages of community, motivation, and education.

I think just getting a bunch of smart, business-savvy guys in the same room together to work would be a remarkably great thing for the community. Look at all the benefits reaped from startup weekend, and that was just three days. Imagine if we could string that kind of environment along for months at a time.

Would that be worth equity to me? Definitely. Is it worth 5-10%? Probably not. However, the startups would be a bit more mature, so 2.5% of these companies would be worth more than 10% of a just-started-today startup.

Erik Peterson  |  Aug 06, 08 at 10:13 AM

Thats a commitment I think a lot of people would be willing to make regarding working for a year - but the feasibility of that would require raising more money or achieving significant revenues after three months, for two founders. Maybe I've got too much financial baggage for this to be targeted at me, but a team of two living on $1000 a month each for a year is impossible. If you stashed us in GaTech dorms and stole coffee from the ATDC then that might be easier, but that would exclude the married.

Personally, for $25K I could work 80 hour weeks with a partner for three months, and then continue half-time or so for the rest of the year if no new money came in and I contracted part time to support myself.

If you have a viable web startup that is a candidate for this kind of fund, then I think you ought to be able to get some revenue or enough progress to achieve more funding after 3 months of devoted effort (with the support of a sophisticated, connected investor). Otherwise this kind of seed funding won't be of much use to you. But maybe that is optimistic of me. Considering the traction needed to get additional funding in this town, for your proposed budget I would think that a major milestone inside of 3 months would be a requirement for consideration.

And I wouldn't have a problem with 5-10%, because I would want you to have enough equity for it to really be in your interest to promote the company during the next round.

Russell Jurney  |  Aug 06, 08 at 06:35 PM

@Mike Schinkel "I question the $25k being enough to allow someone to work full time for a year *and* pay even basic reasonable expenses. That said, I see a workable model coming out of all this discussion just not 100% sure what it will be yet. :)"

@Paul Stamatiou "That's why I think this would be better geared towards recent GT grads with technical talent looking to do the startup tango with local entrepreneurs"

Do you catch the irony where you are basically saying "This should be about *my* needs and not those of others?" '-)

I'd really like to see something evolve that embraces those GT Alumni that graduated in 2008 AS WELL AS those that graduated in 1988. You have the energy and enthusiasm, we have 20 years business experience...

@Erik Peterson
"But judging from the responses, I think what might be less risky, easier to setup, and a good starting point for the above would be a co-working program. Something that isn't centered on money, but would provide all the advantages of community, motivation, and education."

100% spot on Erik!

@Lance
"So one of my takeaways from these responses is that there is no desire by Atlanta area entrepreneurs to have a YC type model because the $25 offered (for up to 4 founders BTW) to work in the program for 12 weeks full time and commit to working on the project for a year is not attractive. Do I have this right?"

I think there is a class of people that might jump on this but I can't see if working even for a GT grad right out of school unless they have a business that can cash flow itself in 4 months.

Frankly, I really think giving someone $25k, which many young entrepreneurs with stars in their eyes would take if offered, would be sadistically setting them up for failure. Listen, I know what it is like to have a business that has proven potential (>$10 million/year) but was still under-capitalized and it is an F'ing nightmare. I wouldn't wish that on even the most obnoxious entrepreneur around these parts.

If you really want to do something like this, IMO you need to give them $100k *and* a commitment to pro-actively help them raise the next round (or not, if a low-overhead web company.)

JMTCW.

Mike Schinkel  |  Aug 08, 08 at 04:03 AM

"I question the $25k being enough to allow someone to work full time for a year *and* pay even basic reasonable expenses. That said, I see a workable model coming out of all this discussion just not 100% sure what it will be yet. :)"


That is a fairly common local response I believe because it's way too risky in the local climate.

Let me compare:

In Y-Combinator world, it's just the beginning to something very big.

In Atlanta world, it may be the end to the last amount of money you'll get for a while.


In other words,

in Y Combinator world, it's: "what do we have to lose?"

in Atlanta world, it's: "what do we have to gain?"

Different risk models based on the startup ecosystem.

Another way to look at it:

in Atlanta, the worse case is you're out of a job and can't pay your bills

in SF, the worse case is you'll have to start another company or go to someone else's startup.

The (perceived) consequences of failure are so different. I do believe, however, that they are just perceived. Those perceptions should be able to be shaped over time.


Jeff Haynie  |  Aug 08, 08 at 04:51 AM

@Jeff Haynie: Are you saying that from an investor's perspective of an entrepreneur's perspective?

Mike Schinkel  |  Aug 08, 08 at 04:03 PM

I'm working up a YC application right now and I'd love to be able to submit it to a local group. I've been eagerly awaiting any new news of BoostPhase ever since I joined the Facebook group so many months ago. In fact, I would prefer to submit it to a local group, as I'm a little turned off by the "Silicon Valley is the center of the universe" vibe that seems to pervade the entrepreneur community.

So, the answer is yes: I can answer the questions and I'd be willing to take the $25k. For me, it's more about the contacts and possibility of further investment, plus help with exit strategies. Plus, my idea has the potential of making revenue very quickly, although probably not enough to reach the "I can pay my bills on it" level.

Micah  |  Sep 04, 08 at 10:06 AM

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