Startable - Healy Jones’ & Prasad Thammineni’s Blog

I was lucky enough to attend a PopSignal event a couple of weeks ago, and was surrounded by a few entrepreneurs who I really respect like the guys over at YouCastr and Dharmesh Shah of Hubspot. We got into a pretty heated discussion on naming your startup. In fact, it was so heated that one of us knocked over his drink (that individual will remain anonymous.) We agreed on pretty much two points: naming your company is really hard and you’ve got to be able to purchase the domain name.

But a bigger question that we batted around was how does branding impact your web business? The opinions ranged from branding is just as important as it is for offline businesses to branding doesn’t really matter in the era of google juice. I’ve been thinking about some of the data that I’ve seen on branding, search volume and traffic. It’s pretty hard to find really tangible information on this subject, but there was a study done by MSFT and Comscore that showed a serious positive impact when branded advertising (display) was combined with search advertising.

Probably the coolest study I’ve seen on branding and online businesses is the chocolate covered grasshopper campaign that Grasshopper did when they changed their name/branding from GotVmail to Grasshopper. I don’t know if you remember this campaign, but they FedExed something like 25,000 chocolate covered grasshoppers to technology and entrepreneurial thought leaders earlier this year. I was in Pixily’s office when Prasad got his… it certainly got everyone’s attention! But did it work?

Thanks to the case study published by Grasshopper we can actually see if it did! The company spent approximately $68k on the marketing event, including the price of grasshoppers and shipping. In two months they got over 150 blog mentions, 8 TV mentions and 51.7k unique page views. More importantly, the Alexa visitors to Grasshopper.com eclipsed GotVmail.com and the new brand’s site seems to continue to outperform the old brands since the campaign - and in aggregate traffic to the two brands is much higher than to the single GotVmail brand pre-branding campaign.

online branding campaign results

My conclusion would be that there is still space for really creative branding campaigns in the online world. In fact, given that it is now easier than ever to track this sort of a campaign it is almost surprising that more companies don’t experiment with these sorts of attention getting branding campaigns.

BusinessWeek recently ran a piece on the contraction in the venture industry is causing some startups to lose their VCs. The article talks mostly about how the shakeout in VC is causing some venture funds to abandon certain investment sectors. While I am a happy subscriber of BusinessWeek, I think they missed the real point - that if you lose your VC you are potentially in a lot of trouble. Earlier this year I wrote a couple of posts on What happens when your VC leaves and Steps to take when you lose your VC. I think that advice still stands. Given the back and forth I’ve recently had on the state/changes in the VC industry in my last post, I thought it might make sense to relink to those previous posts and remind everyone that the changes to the early-stage financing world are not yet over!

There has been a lot of talk recently about the amount of value venture capital brings to the US economy. As usual, this includes a lot of griping by entrepreneurs who were unable to raise venture funding and who thus rip on venture capitalists. Occasionally, there is an academic report that attempts to shine a little light on the subject. Many times these professors do not really understand VC, having never helped start a company nor invested money in startups. But on those rare times when a person who really understand finance and startups publishes a robust study it is really worth paying attention.

That is why a recent TechCrunch article, “What Have VCs Really Done for Innovation,” posted by Vivek Wadhwa, has got me thinking. Vivek is a professor (at Harvard, and I think Duke) who has also helped grow software companies and worked for CSFB. Not only his is his background the right one to study entrepreneurship and venture funding, but his post was thoughtful and much more measured than the typical VC-bashing.

Vivek is responding to the NVCA’s recent PR campaign. In this campaign, the NVCA highlights venture capital’s contributions to the US economy and how a lot of innovation in the US has been done at/by venture funded companies. Here are some of Vivek’s key points, as picked by me:

1. The NVCA claims that 81% of tech jobs and 21% of GDP is produced by venture-backed companies; Vivek responds by asking: “would those jobs never have been created if the VCs had never appeared on the scene? How can the NVCA prove causality?”
2. He highlights some research he is about to publish on how, after interviewing over 500 successful entrepreneurs, only 10% raised VC in their first venture and only 25% raised VC for their second. In other words, not that high of a percentage of successful companies bother/need to raise venture funding.
3. “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.”
4. VC investments don’t really out-perform other investment asset classes (he specifically discusses research vs. the Russell 2000 index).
5. “What’s behind the NVCA’s voodoo economics? Even though they vehemently deny it, VCs are looking for bailout money and tax-breaks.”

These are some pretty negative opinions - from someone who has a right to be making them. I agree with some of his points, but not all. At the risk of sounding too much like a VC industry defender (remember I used to be one!) here are my responses/takes on his points:

5. Starting from the last point, I think Vivek is half right. The venture industry is fighting a real battle to avoid having their carry taxed as capital gains. However, other than a change in government policy towards cleantech I don’t think VCs are looking for bailout $. What I really think VCs are looking for from the government is to try to avoid being lumped in with “evil” private equity and hedge funds and thus become regulated as “risks to the US economy.” See my post on how private equity regulation might impact venture capital firms. In fact, this point is really a core reason why the NVCA has started making so much noise recently. Regulation could have a negative impact on venture investments, at least for smaller firms that can’t afford the time and effort to comply/prove to the government that their investments aren’t about to cause a global financial meltdown.

4. He’s probably right.

3. Again, he has a real point. But I disagree that all VC funds ignore innovation. First of all, what defines innovation? Would Google have been innovation? It’s not like they were the first search engine. In fact, the search space was already a sexy place to invest when they got funded. But, as a user of their search, analytics and ad words products I’m pretty happy this non-innovative company received money from their venture capitalists. Secondly, what makes venture capital so important for the US economy is not just the creation of innovation, but the commercialization of innovation. Universities are great at fostering innovation, but it is usually companies that take that innovation and create jobs and technologies that can be used. But, I do agree that there is a lot of me-too investing in the venture capital world. Too many of the same ideas do get funded - sometimes I actually wonder if this actually hurts innovation by creating too much undifferentiated competition in nascent markets. But that is probably something for another post.

2. I also agree with this. The ratio sounds about right. I’m willing to bet that many of those unfunded companies would have been less successful if they had raised venture capital. Venture funding is not right for most companies, even “successful” ones. Entrepreneurs too often think that their business needs venture funding to be successful - but as I like to say “don’t raise venture capital.” But I don’t think this is an indictment of the venture industry; it is more a generic point that most companies do not require VC to get where they are going.

1. I can’t really speak to the validity of the NVCA’s numbers in terms of what % of the US economy is based on venture funded businesses. However, I can say that venture funding does help companies get bigger faster. I know I just made fun of it, but would Facebook be as large as it is without venture funding?

Vivek has some very good points, and he presents them with data - which makes them even more powerful. I understand his negative reaction to the NVCA’s PR campaign - it is a little over the top. However, I think venture capital is important to this country’s technology leadership. While I don’t think the US needs MORE venture funding, I do think that a healthy early-stage financing environment is necessary to foster continued innovation here. I hope that as we come out of this downturn and seek to change the financial landscape that early-stage investors are not caught in a regulatory net designed to keep hedge funds from doing silly things with highly-leveraged derivatives or other exotic instruments.

So, Facebook announced yesterday at TechCrunch50 that they were finally cashflow positive. This is pretty big news. It means they’ve created a real business, one that is, in theory, self-sustaining. They’ve reached the holy threshold where venture capitalists stop biting their nails and thinking “man should I have sold this earlier…” Now the management team can seriously start getting wined and dined by investment bankers hungry for “the IPO of the year.”

But, after we congratulate the team for a job well done (nice job people) we probably ought to think about what this means for social media as a business. Here is a company that now has 300 million users - and has just now become cash flow positive. What is that, like 5% of the Earth’s population? What number of companies ever founded reach that high of a global penetration? That’s a pretty amazing number. And they needed that many users to become cashflow positive?

I believe that Facebook has raised over $700 million in venture capital. Impressive. I doubt that more than a handful of companies, ever, have raised that much private capital. I don’t know how much of that has been used in the quest to become cashflow positive, but I assume it is a decent amount. Although, to be fair, a meaning amount of that capital might have gone to providing liquidity to the management team.

So what does this say about social media as a business model? The requirement to get sooo large and burn sooo much capital calls into question the basic business model of a social media company. The pure online company with revenue only coming from advertising just doesn’t seem to make sense if you have to get that big to become a self-sustaining company.

Just to be clear - I am not questioning Facebook. I am pretty much amazed at what they have created and am excited to see what is next for the company, both as a venture-junkie and a FB user. But I just wonder if these stats are the death nail in the advertising-based online business model. Who else could possibly reach cashflow positive with a pure advertising model if you need that many users and that much capital?

A few quick interesting links:

A good friend of mine just posted a study on the impact of social media on generating actual leads vs. search on the Hubspot blog. In a not surprising conclusion, social media traffic had a much better conversion of traffic to leads (i.e. was higher yielding) than search traffic. I guess this makes sense, because if someone is engaged enough to connect with you via social media then they are probably a better potential customer.

Congratulations to DataXu, and Atlas Venture portfolio company, for formally launching its service. DataXu is a bidding platform for online display advertising and has a solid team from MIT and is headed by Mike Baker, and experienced online advertising executive. Good luck to them as they grow the business! I like the company because I believe that there is a funny power dynamic in the online advertising world - powerful ad sellers like Google also are the major suppliers of ad optimization technology to the ad buyers. So, basically the people who sell you the ad also provide you with the tool to decide if you want to buy the ad. This may or may not be a real conflict of interest, but it is strange. I always imagine the analogy of the car dealer also being the one publishing Consumer Reports. A player like DataXu should help ad buyers become more sophisticated and control their own data.

Finally,

Intuit has agreed to buy Mint.com. This is pretty cool! I believe (or hope at least) that this shows that consumers are moving aggressively to embrace the power of the internet to manage important aspects of their financial life. The thing I always thought was smart about Mint was that it required zero work - you input your account numbers and passwords and the engine does the rest. Pretty slick. Has anyone defined Web 3.o yet? If Web 2.0 was social media/having your friends and others create the content for you, is Web 3.0 automatically surrendering up lots of personal information and letting the web/AI make sense of it all?

Wow, the Techstars Boston Investor Day last Thursday was great! I can’t believe the progress made in the past month by the teams. I’ve been a very absent Techstars advisor for the past month, so I didn’t know what to expect. Everyone in the crowd seemed impressed by the startups, and I felt a great vibe and high level of interest from some of the well-known Boston angel investors I spoke with during the event. Andrew Hyde mentioned to me that it felt a lot like Investor Day at the 1st Techstars Boulder in 2007 - and that 3 of those companies have had successful exits. Let’s hope that the good Techstars mojo continues here on the East Coast. To that end, here is my advice to the Techstars entrepreneurs on keeping the positive momentum going post-Investor Day. I guess the gist of my advice is that the hard work hasn’t ended - it’s actually just begun. But you are in such a great spot that you should be excited to keep moving forward and you should continue to take advantage of everything that Techstars has created with/for you - especially the network.

Techstars Boston, photo by Andrew Hyde

1. Don’t take a breather. You have a narrow window to exploit the momentum that you’ve created. Investors and the press are interested in what you are doing, but they have notoriously short attention spans.
2. Follow up with EVERYONE you spoke to. Send emails to each and every investor that you met - ask Shawn for their contact info if you didn’t capture it. These emails should be out by Monday afternoon at the latest - again, people have short attention spans. Did you speak to any of the tech reporters at the event? Heck, even if you didn’t get a list of the reporters (and bloggers) at the event from Shawn and send them a “thank you for attending email.” Include a three or four sentence business description so they remember who you were. Finally, offer yourself up to talk to them about Techstars or ASK for something.
3. Hit up your local tech press if you’re not from Boston - with a “the local tech startup doing something big time” angle and see if they bite.
4. Have an opinion on the terms of your investment round. This will help move the angels along more quickly.
5. Look for an investor “anchor” for your angel round (if you haven’t already raised your capital/got your fund raise going.) You need an angel to set the terms for seed round, so that the other angels will fall into line and step into the mix. I know a few of you have investors approach you and express high interest in the business. Those are the ones to hit up first. Once you have an anchor things become much, much easier.
6. Consider doing a tranched close on your round so you can get money into the company sooner rather than later (this means taking less than 100% of your hoped for fund round and continuing to work toward getting the other % at the same terms in the not too distant future). Angel rounds seem to take even longer than VC investments, so if you can get some of the investment dollars to come in right away that will help you do important things like pay for developers and ramen.
7. Take the free stuff. If Techstars offers to let you stay in the space for a while, take it. You probably had a good routine going pre-Investor Day in the space, so why mess things up? Keep the same schedule going. Cheap or free rent is VERY hard to find. And if Shawn wants you to pay for the space, well, talk him down as much as you can or ask for the first month free or something.
8. Stay in touch with all the other companies! How awesome were these other entrepreneurs? You have one of the best advantages of any startups - a real, legit peer group. Do you know how lonely doing a traditional startup is? You don’t have that problem! Those other CEOs and founders want you to succeed just as badly as you do. They will experience the same issues that you will face, sometimes before you do. Hit each other up for advice, networking and friendship.
9. Keep the weekly email updates going. It will help you stay focused - and you don’t want to lose the connections that you developed during the program.
10. Don’t get distracted. $, PR and continued growth of the business are your near-term goals. Don’t forget about the business while you take advantage of the external momentum. Set aggressive near-term business goals and hit them.

Finally, a bonus tip:

1. HAVE FUN! You are better off than 95% of all startups in the world. Your network is so much stronger than anyone else I know. Your peer group is strong, smart and passionate. You guys and gals are awesome - kick some butt! (And don’t forget about little old me once you hit it big time…)

Link to Andrew’s photos of Investor Day: http://www.flickr.com/photos/bouldair/sets/72157622218729239/

Great post by Mark Suster on when, if and how startup founders should be allowed to take money off the table before their starup has reached a real exit. Mark’s basic thesis is that it is sometimes a great idea for startup founders to sell some of their equity to their investors. He discusses his own experiences and suggests how he would have managed his own companies differently and/or not sold them when he did. His post is well reasoned and is worth reading. He does suggest a few scenarios where this makes sense and should be allowed, including the founder having been with the company for a certain number of years, limiting the $ amount to something reasonable, etc.

What I’ve seen is that early-stage VCs with big funds are not against buying common stock from founders, when the startup is doing well. As I’ve mentioned in my startup valuation post, VCs are always thinking in terms of their percentage ownership. When the company is doing great and VCs with deep pockets are already investors and want to increase their ownership, so if that means potentially buying stock from founders you may be in luck.

One of the other funds I worked for, Summit Partners, made a living off of buying stock from founders. It worked pretty well, since Summit liked investing in companies that were profitable and growing - and hence didn’t really need traditional venture capital to grow the business. Founder liquidity was the general excuse Summit used to get into some great companies.

I’m not at all against the idea of founders taking some money off of the table, provided the company is doing well and provided they continue to own enough of the company to continue to care about its success and work hard to keep it growing. I do think this would be a real advantage of selecting a larger sized fund as your initial venture capital investor. Smaller investors may not have the additional cash reserves available to both fund some liquidity and also continue to have enough in reserve to fund the company’s growth.

James Geshwiler, a local angel investor and a managing director of CommonAngels, has an interesting post in Mass High Tech entitled “Hey, Boston-area VCs, angels: Loosen up and connect with startups.” Besides the catchy title, James has a good point. I’ve debated this point with some of my venture capital friends, and I believe one of the most important roles of a VC - even if they are not invested in your company - is to help connect startups with others. Other startups, executives, potential customers, press and potential exits. This goes well beyond the whole recruiting-people-to-work-at-the-startup issue.

One of the things that somehow gets overlooked when the East Coast VC world is compared to the West Coast’s is how aggressively many of the most successful West Coast VCs promote their companies. And how aggressively the promote their companies to the RIGHT people - people who run companies that will one day acquire those startups, or buy their technology.

If you are a startup in the fund raising process, don’t be afraid to ask the venture capitalists for introductions. If you impress or interested the VC enough, they just might be able to connect you with the individual who will somehow help drive your company to success. It doesn’t hurt to ask!