Startable – Healy Jones’ & Prasad Thammineni’s Blog

I bet your startup should NOT raise venture capital. In fact, I think there is a good chance that venture capital could ruin your technology business. It’s true that some businesses need to raise substantial amounts of funding to create value. However, many of the companies that I talk to, especially in the Web 2.0 space, do not need venture funding and probably should not attempt to raise funding from VCs.

Let me provide a little bit of context here, so that hopefully you can understand where I am coming from (and hopefully so that you don’t think I’m a cocky jerk.) Yesterday I attended a roundtable Web 2.0 session sponsored by TCN over at Babson College. It was a good event that was quite well attended. I met a number of smart people who were starting internet businesses. (Also, please note that in this post I’m talking about internet businesses – some other industries such as semiconductors or clean technology have clear up front capital needs and most likely have to raise venture funding.)

During a panel discussion, a well known and quite successful venture capitalist was answering questions from the audience. As this VC was speaking, I could see the entrepreneurs in the audience becoming depressed as the VC made it clear how hard it was for the typical Web 2.0 company to create venture returns, and thus how difficult it would for the startups in the audience to raise venture funding. 

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On Monday I attended Amazon’s Web Services user group meeting in Boston. The event was attended by at least 50 startups (several of whom had pretty cool businesses), and a few venture capitalists as well. While I was a little disappointed by the lack of detail on the Amazon product road map that was presented, I did find the event useful. In particular, Amazon announced a new contest for startups using Amazon’s Web Services. The AWS Startup Challenge will award cash and web service credits to the winners. I’d encourage any startups using the Amazon platform to check out the rules and prizes.

These sorts of contests are good for startups for several reasons:

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You probably read quite a few articles on how to answer this question. You have heard extreme things like, “your idea is not worth anything unless you implement it” and “this is how you calculate the true value of your idea”. Well, I am not going to spend anytime addressing this question from that perspective. Instead, I want to share my thoughts on what I think an idea is worth during a firm’s lifetime. I believe the value of an idea diminishes as time passes and instead, is replaced by the value of its execution.

Day 1: Firm’s value = The idea’s value

On day one, all of you have is the idea. You do not have a product, customers, revenues and of course profits. Most likely, you don’t have a team either. The firm’s value is same as the value of your idea. It could be $0, $1000, or a $1,000,000. Whatever that number is, your firm’s entire value is the number.

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Prasad and I have been blogging about cloud computing and how it has sparked a massive round of new web services innovation. The advantages of using cloud computing for a startup’s backend are obvious; Prasad has touched on them before: low capital outlays; no long term contracts; Scale up and down on a whim; high availability, security and reliability, etc. However, if it is easier for your startup to enter a market due to cloud computing, then it is also easier for others. One way I’ve seen startups attempt to build barriers to entry/competitive differentiation is by using the data created by customers as a weapon.

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This is just a quick post to let startups who are using Amazon’s web services know about “AWS Startup Tour.” Amazon’s web services team is on the road meeting with startup CEOs this month, and will be in Boston on September 22nd. I think, besides me, several other venture capitalists will be there as well.

Prasad has posted on the cloud computing revolution and how it is enabling a new wave of startup innovation. As the cost of launching a new business drops we are seeing some very interesting web-based companies that would not have been possible just a few short years ago. AWS seems to be dominating the startup cloud services market. Here is a great chance for startup CEOs and CTOs to interact with the team behind AWS. I’ll be there and I hope you are too!

Pixily presented at last night’s Web Innovators Group meeting and walked away with the Audience Choice Award. Congratulations to Prasad and the team for the great showing! Pixily is on a roll…

Startup founders tend to ask a pretty common sense question during their meetings with venture capitalists, “What is your process?” This is a good question, because the CEOs want to know how much of their life they are going to have to waste trying to raise venture capital. It’s helpful to know where the goal line is so that you have an idea of how close you are getting. The bad news is that early stage VCs tend to have pretty non-defined processes – assuming that there ANY process at all. As such, I’ve created this helpful diagram so that you can try to guess where your company is in its capital raise:

The analogy is pretty simple; raising venture capital is a lot like pushing a boulder up a mountain. It is really hard at first, but at some point things start to click and eventually it is all about making sure the appropriate issues are examined and that the company has a real plan to execute on its vision. Unfortunately, as a startup founder, you really don’t know how tall the mountain is, how heavy the boulder is, how steep the slope is, where the top is, if there is only one mountain, or really anything at all when you first start the process. The good news is that the venture capitalist is in the same boat. In fact, if venture capitalists weren’t such stupid optimists I don’t think there would be any venture capitalists. Actually getting an investment done is so difficult and the hit rate of closed investments to companies met is so low that it’s depressing.

Here is a little bit more about each step:

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I’ve continued to play with Chrome and think about its implications, as any good* venture capitalist would do, and I’m starting to wonder if the real target for Chrome is Apple, not Microsoft. Stick with me for a second while I brainstorm on this (we are in the trust tree here, so I’m thinking while posting, always a dangerous thing…)

There has been a remarkable change in many of the Web 2.0 presentations that I have seen recently vs. those that I saw a year ago. One year ago, startups presentations to VCs had a bullet that said “Mobile strategy, blah blah.” In other words, the startup CEOs recognized that mobile was going to be a real part of their company’s product and marketing strategy, but were only at the articulation stage. All that has changed. Mobile demos are now a regular and important part of the VC pitch, and startup founders are spending just as much time showcasing their working mobile applications as they are demonstrating their pure web based product. Read the rest of this entry »

As a venture capitalist, I get a somewhat high level view of the economic landscape affecting startups. While I’m sure it’s not news to anyone, from my vantage point it does appear that the enterprise technology slowdown is now real. Startups that I met with several months ago have been returning with lowered plans. More sadly, several startups that were not able to raise funding from us or other venture firms have thrown in the towel based on slow revenue traction. Forrester research’s just released CIO study confirms that overall IT spending is down. My perspective is that Q2 enterprise IT spend was not healthy and Q3 will be worse.

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There is a great post last week by Mark MacLeod, an experienced CFO, on the size of later venture capital rounds and the valuation of the companies receiving the capital in those financing rounds. A study by Silicon Valley Bank supposedly shows that if a startup raises over $5M in a Series B then it is more likely to experience a step up valuation from its Series A… while a company that raises less than $5M is more likely to not show any increase in valuation from its Series A VC raise. This trend continues with later rounds of venture capital financing.

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