Seeing projects and companies develop over a weekend is certainly an interesting phenomenon and says a lot about what hardworking and focused individuals can accomplish. With that however, the question still remains as to what is really needed for startups, especially web startups, in the current state of the web and economy.
First and foremost, the question of money and funding always comes up and usually when it’s not needed. Web startups in particular obviously do not, in their initial stages, require a great deal of capital and this a good thing. Case in point, Startup Weekend groups manage to come together and with copious quantities of coffee, put together working applications or projects that only require hosting etc. Granted, at later stages in development when scaling becomes an issue (a good problem) capital does become necessary but still not to the extent that say a biotech or semiconductor company might need.
So, outside of money and absolute essentials (hosting, servers etc.) what really is needed? Well, clearly the most important asset for a seed-stage startup would be the people and founders. Their vision and sweat equity put into the company will ultimately determine it’s future outcome. Further, with the current state of the economy and the severe drought in M&A transactions, IPO’s, and investments overall (great WSJ numbers for private equity article), it seems that monetization strategies are more important than ever. Even if your application would be a perfect fit with X company, the M&A exit strategy no longer remains as viable an option as it once was (last year). Being able to produce revenue — and profit — that prove your application’s worth will likely become more important as ad revenue/unique visitor strategies become harder to execute.
In any case, startups require a great deal more than the few things I’ve discussed here but it certainly is interesting to consider what becomes more essential over time especially as it relates to major shifts in the economy and development community.
As promised, I bring you the second portion of the Funding Startups and You discussion and although it won’t be as informative, it should contain some useful gems of knowledge. As if understanding when to rally for funding wasn’t difficult enough, I think that there are many common mistakes made by entrepreneurs when pitching a VC or potential investor and I thought I’d list just a few for examples. (Be warned, I am not an expert on funding but rather have been able to draw upon some experience to come up with useful tips)
1. This is probably the most important and most useful tip for any entrepreneur looking to raise money — do not argue with the investors and proclaim that they simply “do not understand” your idea. There are a variety of stories that go along with this particular tip but the most notable involves a certain vcwear t-shirt about contextual advertising. Generally if an investor does not like your idea, accept the criticism and use it to hone your pitch for the next set. Sometimes an investor will pass the first time but later wish to be involved in follow-on financing rounds. Do not burn bridges.
2. Understand your market. This seems like a obvious tip but in listening to pitches I was amazed at how many entrepreneurs either did not know their market size and growth rate or gave market size estimates that were vastly overstating their product’s reach. For instance, if you’re building an application for pharmaceutical sales reps, your market is not pharmaceutical sales and using the multi-billion dollar figure will not mean anything.
3. Know your competition and why you’re better — or not. Generally with technology plays it is always good to know why you are better than Google, Microsoft, etc. Given their immense resources, the question “Why couldn’t Google just assign 10 people and do this in two weeks?” will come up and you should have some sort of answer, even if there is not way to defend against such a move. Understanding competitive forces in the market will save you a lot of time in the future and may help you tweak your idea to make it more realistic.
5. Choose your investors wisely. It seems like common sense that if you’re developing a web application you would not pitch a biotech investment firm but sometimes this happens. Generally it is good practice to specifically target investment firms that you think could offer a lot to your company (outside of the check they write). Mass emailing 100 firms in your area will likely result in zero responses and may be detrimental to your idea.
Hope that helps and feel free to add your own tips in the comments.
As Startup Weekend continues to grow and foster communities of development in the US and abroad, it seems more than likely that several companies formed or worked on at these weekends will eventually endeavor upon the funding adventure. With that in mind, funding in any form (venture capital, angel investments, grants, bootstrapping) can be somewhat confusing and daunting depending on your company’s needs. Although I am by no means a seasoned investment veteran, I have spent time on the other side of the VC table looking at companies as well as struggled with creating an effective pitch for investors.
As such, I thought I might just post a few thoughts about my personal experiences and link to some great sources of information and wisdom that I’ve encountered over the past year. In the first case, deciding when funding is needed can be a strategic decision or one of pure necessity. In the former, an entrepreneur and team may have an excellent idea that will require significant upfront capital or the added expertise of investors in that industry (biotech, biomedical devices, superconductors etc). On the other hand, funding can sometimes be absolutely essential (see Twitter) for a service to maintain scale and usability. Or, perhaps the company is doing just fine but 100 Aeron chairs and a company Porsche are essentials for success.
More often than not however, bootstrapping the venture will be the “funding” method used as professional investment occurs for only a minuscule portion of the new companies started each year. In this case, the founders should do everything they can to spend as little as possible and build the business to a point that either investment would make sense or it is generating enough revenue to be self-sustaining. Holding off on funding as long as possible will lead to a higher valuation, higher portion of the company retained for the founders, and an ideal situation for achieving the next level of growth and development. With this in mind and in dealing with web application development, holding off on pitching your idea will allow you to develop the idea to a point where funding makes sense and won’t take as large a portion of equity when the term sheet is put on the table. For more on this I would highly recommend checking out Brad Feld’s blog, the associated Ask the VC, Fred Wilson’s blog, and a variety of other sources that I’ll post in a list over time.
That is all for now but stay tuned for Part II — pitching tips and more links.
Seeing projects and companies develop over a weekend is certainly an interesting phenomenon and says a lot about what hardworking and focused individuals can accomplish. With that however, the question still remains as to what is really needed for startups, especially web startups, in the current state of the web and economy.
