Don Dodge on The Next Big Thing

The Entrepreneurs Dilemma - Sell now for $Millions or holdout for $Billions?

If you had to choose between selling your company now for $100M or continuing on for another 5 years or more and maybe selling for $ Billions, what would you do? Every entrepreneur hopes to have this dilemma, but when it happens it is a difficult decision with many different factors.

This week I had the opportunity to talk with several entrepreneurs who faced this decision. The results were different in each case, but the major factors in the decision were the same.

Competitive environment - Are you in a leadership position? If you have already carved out a dominant position in one market and could move into other market segments or geographies, that would argue for staying private and going for the big exit. On the other hand, what if the big billion dollar players are  entering the market? What if the market is consolidating, and your competitors are being acquired by big players?

Financial structure - Is your company well capitalized and profitable? If so you could probably grow organically, without raising more money or taking dilution. However, even in this case you may not be able to grow fast enough to keep up with the competitors and market movement. If you need to raise more cash, or are not yet near cash flow break even, the decision is more complicated.

Economic environment - Is there a recession looming or is the market booming? If the market is booming and you have a good competitive position, you may want to raise more money and holdout for the big exit.

Age of company - Startups are full of enthusiasm, vision, and hope. After 7 years or more is the fire and passion still there? Most employees are fully vested by then. Are they still totally engaged or are they leaving? A startup can't stay a startup forever. The dynamics change. You need to keep a finger on the pulse of the whole company.

Founders - Are the founders still at the company and still passionate? Are the founders financially secure, or are the looking for an exit? Can the management team take it to the next level? These are the toughest questions to face and answer honestly.

Investors - Venture Capital investors need to answer to their Limited Partners each year. If the fund has already generated a nice return for investors they may be more inclined to holdout for a bigger exit. If the fund is not doing well they may push for an early exit.  You may have several VCs on your board who have opposing views and motivations.

Employees - After 5 to 7 years many employees are fully vested. They may want to buy a house or put away money for the kids college education. Engineers and creative people may be looking for a new challenge. Keeping key employees is always a factor to consider.

Alternatives to selling out now

Raise more money - You may be able to raise more money but the valuation is likely to be less than a buyout offer. Investors may demand onerous liquidation preferences that put prior investors and employees at a disadvantage. Raising more money also means your eventual exit valuation must be much higher to satisfy all investors. This is actually something to consider at every stage of raising money.

Take some money off the table - Many times the founders have not made any money previously. They want to cash in a few million dollars so they have some financial security for their family. Then they can push ahead another five years and hope for the big payoff. Most VCs don't like this idea. They don't want the founders taking "their" money out of the company. The VCs want the founders to be "hungry" and push for the long haul. Founders Fund, and a few others, think their interests are better aligned in they allow the founders to take some money off the table. As you might imagine there are some very strong opinions on each side of this question.

Give the founder a break - Sometimes the founders are tired after 7 years of pushing hard 7 days a week. Sometimes it is a good idea to rotate the management team and give them new challenges. There are cases where the founder / CEO moves to chairman or CTO, or even leaves the company but stays on the board.

New management to take it to the next level - Many times founders are great at starting a company but not so good at managing growth, hundreds or thousands of employees, international complexities, and all the other challenges of big companies. The skills required to go from zero to $10M are very different than those required to go from $50M to $500M. So the question becomes do we sell out now for millions, or do we reorganize the company to prepare for the billion dollar trajectory?

What would you do?

One CEO I talked to evaluated the situation and decided to sell now for about $150M. The VC investors agreed that it was the right decision. Employees are happy. The merger just made sense.

The company was not profitable. He said he could have raised another $30M, but at a valuation that was 20% to 30% below the buyout offer. Raising the additional money would have raised the acquisition envelope to $300M to $500M in order for the new investors to get the multiples they were looking for. He asked "How many companies sell for $500M?" Very few. So, the investor multiples worked at $150M, but they would need to be much higher if they took on new money. He also mentioned the competitive environment with new big players entering the market and consolidation happening all around him.

Another CEO I talked to decided to take the plunge and go public now rather than wait for a better market and higher valuation. This company is a leader in their market. Going public was important for several reasons. First it gave them increased credibility with their customer base. Second, being public also gave them stock currency to make acquisitions. Third, it gave them access to raising more cash on the public markets with much lower dilution than they would get from VCs.

Another CEO said they decided to sell out in the $150M to $200M range. They had been at it for over 12 years and decided the acquisition made sense for many reasons. However, he did say the integration issues with the big company were a hassle, and that the culture of the startup company was changing.

The conversations with these founder/CEOs were fascinating. It was interesting that each of them, almost without recognizing it, had to deal with many of the factors mentioned above. I suspect that every company faces these issues when contemplating a buyout offer whether it is $10M, $100M, or $1B. No matter how many zeros you add to the number the basic issues remain the same.

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Guitar Hero a 10 year overnight success

Eran Egozy, co-founder and CTO of Harmonix Music Systems was on a panel at the Nantucket Conference entitled "Tipping Point: The keys to getting new ideas to take off". Harmonix is the maker of Guitar Hero, the wildly successful video game.

Guitar Hero was an instant...overnight success, 10 years in the making, selling over $1Billion to date. Harmonix was founded in 1995 but Guitar Hero didn't come along until 10 years later in 2005.

What did Harmonix do in the first 10 years? Harmonix founders met at the MIT Media Lab and their first idea was to create new ways for non-musicians to experience the joy of making music. Similar to another MIT Media Lab company called HarmonyLine, this idea never really took off.

Eran joked "For the first four years we couldn't sell anything but stock. We knew that wasn't a business model, but at least we had money coming in to keep us going."

Around 2000 they decided to try applying their music technology to video games. But it was 5 more years until they tasted success. They released eight video games over that period, with modest results. Eran said "The trick in the video game business is to make enough money from your game to keep you going until you can release your next game."

Most new video games don't make a profit. The game business is very much like the music business, or even the venture capital business, in that it is a "hits" driven business. One big hit pays for lots of losers.

Guitar Hero was the 9th video game produced by Harmonix, 10 years after founding the company, and it put them on the map with more than $1 Billion in sales. They recently sold the company to MTV Networks, a division of Viacom for $175M.

iRobot a 12 year overnight success. Colin Angle, founder and CEO of iRobot told a similar story. iRobot was founded in 1990 with the idea of creating robots to do interesting stuff. For 12 years they did projects and built products but never really achieved financial success. Colin said they paid employees once a month at the end of the month. They never had enough cash at the beginning of the month to meet the payroll at the end of the month. But they persisted in their dream.

September 11th 2001 changed everything. They decided to apply their robot experience to help the military in dangerous situations. DARPA, the research arm of the U.S. Defense Department paid out grants to lots of companies to develop proposals for new defense technologies. iRobot won a $200K grant to write a proposal for a battlefield robot.

Colin Angle said the company had never had $200K in the bank...ever. So, rather than use the money to write a proposal they just built the robot. What a concept!! DARPA had a big meeting to review all the proposals from various defense contractors. iRobot showed up with their robot and a tiny written proposal. They won the business and DARPA awarded them a $4M contract to build robots for use in Afghanistan. They have since sold over $150M of robots to the military.

Colin said that iRobot entered and exited 18 different businesses over their 12 year existence before finally landing on the military robot idea. They have since entered the consumer market with robot vacuum cleaners and swimming pool cleaners.

Persistence and tenacity are hallmark qualities of successful entrepreneurs. Harmonix and iRobot are excellent examples of that never die attitude. There is a fine line between success and failure. There is no secret formula or obvious path to success. Just one common trait...an indomitable desire to succeed against all adversity and doubt. Very few people have this drive and the leadership ability to attract great people to their cause. This drive is indefinable but we know it when we see it. It is sometimes misdiagnosed as being delusional and fanatical. The difference in diagnosis is success or failure. Succeed and you are a brilliant visionary. Fail and you are a delusional loser. The line between them is very fine.

Sim Simeonov of Polaris Ventures is also at the Nantucket Conference and has a great blog post about "Top 5 suggestions for startups from IDEO". Lots of great speakers and content here at the Nantucket Conference.

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Boston startup events and resources

Boston loves startups. The Massachusetts Technology Leadership Council is doing a great job setting up events. Watch the MTLC site for future dates. MITX, The Capital Network, the Angel Capital Assoc, and others are also putting on events. Here are just a few of the upcoming events this week and next.

Tech Tuesday - is a regular monthly meet-up organized by Dan Bricklin, of Visi-Calc spreadsheet fame. Tech Tuesday is for geeks, tech savvy professionals, DIY-ers, press, and other industry luminaries for an informal gathering. Bring your laptops, robots, OLPC XO's, Amazon Kindles, new cell phones, gadgets, and other new-fangled devices. Tech Tuesday meets the second Tuesday of every month. Microsoft is a sponsor this month.

New England Angel Capital Conference - The Angel Investor groups of greater Boston meet once a quarter to review their best companies. Each group nominates companies to present. They are all looking for a round of funding that is bigger than any one Angel Group can handle. This meeting lets all the groups get a look at promising companies and pool their investment dollars.

Entrepreneurial Team Building - a panel of entrepreneurs that have built companies from the ground up and know the ins and outs of building great teams. What really makes a team come together? How can you be sure that you are bringing in the right folks? Who should be hired first, second, next? We'll talk about teams at the senior management level and at the BOD level.

Entrepreneurial Series - Plain English Term Sheets - This is a webinar for startup entrepreneurs who want to understand the details of financing term sheets. What to ask for...and what to avoid.

MITX - Mass Innovation & Technology Exchange have lots of great events for technology based startups. The next session is "Building Social Applications and Widgets".

The Capital Network - TCN's network consists of entrepreneurs on their way, entrepreneurs who have lessons and talents to offer and investors who may have themselves drifted across the entrepreneurial line. TCN has 3 or 4 events a month. The next one is on Founders Equity Issues.

The 128 Innovation Capital Group -  The regular meetings are held on the second Thursday of every month at the Best Western Hotel on Totten Pond Road in Waltham. Every month an investor provides our formal program. After Q&A, our speaker generally remains to speak with audience members, one on one. After the meeting, a roster with the contact information of all attendees is made available to those who came to the meeting.

Web Innovators Group - WebInno was founded by David Beisel of Venrock Capital. Scott Kirsner is also deeply involved. WebInno has regular meetings. The usual format; early stage start-ups and individual innovators will briefly demo their product/service in two different forums. First, there will be a couple center-stage presenters giving five minute demos for the entire crowd (aka “main dishes”) at 7pm. In addition, there will be a number of tables set up at the periphery of the room for live informal demonstrations to smaller groups during the schmoozing sessions (aka “side dishes”). Each will help provide the community a glimpse of current local endeavors in the space and offer the basis for further conversation.

Nantucket Conference - The 2008 Nantucket Conference audience will consist of approximately 150 of New England's top entrepreneurs, investors, and tech executives. Rather than sitting through a series of speeches and PowerPoint presentations, the audience will be engaged in a dialogue - and sometimes a heated debate - with Conference presenters.

Boston based bloggers

Scott Kirsner, a writer for the Boston Globe, and a blogger at Innovation Economy is always organizing and promoting startup events. Watch Scott's blog for announcements of upcoming events.

Jeff Bussgang - VC partner at Flybridge Capital Partners (formerly IDG Ventures Boston). Jeff is a former entrepreneur and now a VC. His blog is appropriately called Seeing Both Sides.

Xconomy - Bob Buderi, Rebecca Zacks, and Wade Roush cover Boston based startups, technology trends, and VC investments.

Mike Hirshland - VC partner at Polaris Venture Partners in Boston.

Nicholas Carr - Nicholas is a former Harvard Business Review editor and author of several books.

Boston based entrepreneur bloggers - Ben Saren (founder & CEO of CitySquares Online), Matt Douglas (founder & CEO of Punchbowl Software), Pito Salas (former CTO of eRoom).

BlogString has an extensive list of Boston events. Thanks to Nathan Burke for the link.

Come on out to these events. I try to attend all of them, and would love to say hello. However, for the next two weeks I am working in Silicon Valley...my second home.

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How to make your startup successful

Mike Arrington at TechCrunch wrote "Startups must hire the right people and watch every penny, or fail" This was in response to a blog by Jason Calacanis, founder & CEO of Mahalo, who wrote "How to save money running a startup". Both stories stirred up a ton of comments, mostly negative, on why they were wrong, and trashing Calacanis for being a ruthless task master.

I agree with much of what Arrington and Calacanis say, and I love this picture that Mike used in his post to illustrate failure. It is very important for a startup to hire the right people and watch every penny. Bigger companies can make a few mistakes and spend too much money on things, and still do just fine. Startups have no margin for error.

I have worked at five startups (Forte Software, AltaVista, Napster, Bowstreet, Groove Networks), and helped hundreds more. There are some common success factors like;

1. Build a product or service people want
2. Customers are willing to pay for it
3. Competitors can't easily replicate it
4. Assemble the best management team
5. Hire only the best people

Those are all obvious points...but extremely difficult to get right. It only looks easy in retrospect. Most successful startups are unique, one of a kind, at a certain point in time, non-repeatable events. If it was easy or obvious everyone would have already done it, or just copy what has already been successful.

Tony Wright, cofounder of RescueTime, a Ycombinator company, has a great post showing that for every example of success there is a counter-example. Tony points to the following examples;

• “Release Early and Listen to your users” VS “Ignore your Users and Build for Yourself.”
• “Seek out Press early and often” VS “go guerrilla until you have a brilliant product“
• “Failure to scale kills” VS “you can have tons of downtime and still grow like gangbusters“
• “Take more funding than you need” VS “overfunding kills“
• “Viral always wins” VS Google Search (which is not REMOTELY viral).
• “Design is critical for user engagement and trust” VS um…. MySpace. CraigsList. Google.
• “Starting a business on Microsoft technologies is ridiculous” VS MySpace or PlentyOfFish (2-3 people, classic ASP, a few MS servers = millions of bucks)
• Headcount! VS Keeping your team lean to force scarcity (CraigsList and 37Signals)

I talk to hundreds of startups every year. They all have some of the elements of success. VCs invest billions of dollars in startups every year. Every entrepreneur and every VC believes they are going to be successful. Very few are.

There is no secret formula or obvious path to success. Just one common trait...an indomitable desire to succeed against all adversity and doubt. Very few people have this drive and the leadership ability to attract great people to their cause. This drive is indefinable but we know it when we see it. It is sometimes misdiagnosed as being delusional and fanatical. The difference in diagnosis is success or failure. Succeed and you are a brilliant visionary. Fail and you are a delusional loser. The line between them is very fine.

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Mark Cuban for President!

Politics, once a noble calling, has degenerated into slime ball, double speak, demagoguery usually reserved for defense lawyers. Many years ago, while I was in college, I did an internship for U.S. Senator Edmund Muskie, and later was a paid staffer for U.S. Senator Bill Hathaway. Politics was different then. Now it is disgusting.

The politicians of both major parties should listen to Mark Cuban.  Mark is talking sensibly about business and tax policy. Please read his blog post (linked above) to get the full picture. Mark has done a masterful job of explaining why taxes should be higher on the super rich, and why $250K per year should not be considered rich.

Warren Buffett has been in the news a lot lately saying that he, and most wealthy people, pay a lower percentage of income in taxes than their secretaries do. That is because Buffett gets most of his income through capital gains which is taxed at only 15%, while most people get most of their income from a W-2 salary which is taxed at much higher rates. Everyone pays a social security tax, known as FICA, of 6.2%, but it caps out at $90K of income. Everything over that is free from FICA tax. Sales tax is another regressive tax ...proportionately it effects lower income people more than rich people.

Mark Cuban actually makes sense of all of this by making several proposals.

Consumption tax on luxury items - "I would be perfectly fine paying a higher percentage of income, both in federal income taxes and as part of a consumption tax on luxury items. If Warren wants to buy or build a yacht for a hundred million dollars. Nail him with a 10pct federal tax surcharge. If I want to buy a Gulfstream Jet for 40mm dollars. Nail me with a 10pct federal surcharge above and beyond current taxes."

$250K per year is not rich - "The perspective that Hillary Clinton is offering that 250k in annual earnings qualifies you as rich is not only ridiculous but its a huge disincentive to those who work their asses off every day and have accomplished a salary that rewards their hard work. It also will impact millions who can least afford it.
I will tell you who will suffer the most if a "tax increase for the wealthy" starts at only 250k. The 50 plus year old executive who has spent the last 25 to 35 years working his or her butt off to reach a 250k salary. The 60 year old executive who is already scared shitless that their job could be eliminated tomorrow and that they have not saved enough for retirement."

Cut taxes on small business - "If we really want to stimulate job creation in this country, take the same approach to small business with fewer than 25 employees that we take to Internet taxes. Outlaw them.
No taxes of any kind on small businesses with fewer than 25 employees. No employer payroll tax. No state or local taxes. No taxes on earnings. Nada. The business owners will pay income taxes on their personal income they pay themselves, but not corporate earnings."

Mark Cuban has it right. The politicians are wrong. They want to make this a class warfare issue pitting the low income people against the high income people. Mark says raise taxes on the truly super rich, not the "high income" people who work hard every day for $100K to $250K.

Mark's idea for not taxing small business (up to 25 employees) would do more for real job growth and economic growth than anything the politicians from either party could dream up.

Give the death tax the death penalty. I have never understood the logic or fairness of the estate tax, which is really a death tax. How is it fair for an entrepreneur to work really hard to build their business, pay very high taxes on their income every year, then pay even more capital gain taxes on their investment income, then pay another 55% in estate taxes on top of all that when they die? How is that fair? Many entrepreneurs have to sell their businesses because their children can't afford to pay the estate taxes. The politicians always trot out the "family farm" example, but the far more common example is the thousands of small businesses of every description that must be sold every year to pay estate taxes.

These issues are too complicated for politicians to understand, and they don't fit into pithy 20 second sound bites...so they never get addressed. Instead we are treated to pontifications on immigration, national defense, and education. And nothing changes.

Mark Cuban, please run for president!

OK, now that is off my chest...I will return to topics I love like technology and business.

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TechCrunch Boston

Mike Arrington organized TechCrunch Boston on Friday night, attended by 800 tech people, and sponsored by IDG Ventures. It was the best tech party of the year in Boston.

The IDG Ventures Boston team was out in force.  I talked with Michael Greeley, Chip Hazard, Jeff Bussgang, David Aronoff, and Kate Castle. Pictured here is Mike Ford (TownConnect), Mike Arrington, and Michael Greeley (IDG Ventures).

This was definitely an event for startups and entrepreneurs but I did talk to some other VC's including; Michael Skok (North Bridge), Lucy McQuilken (Intel Capital), Steve Schlafman (The Kraft Group), and Charley Lax (Grandbanks Capital).

Punchbowl Software was one of the startups doing demos at TechCrunch Boston. Here is David Aronoff (IDG) and Matt Douglas, CEO of Punchbowl (center) hamming it up with Mike Arrington of TechCrunch.

Mike was like a Rock Star. There were entrepreneurs and pretty women crawling all over him. Towards the end of the night Mike made me his manager/agent in charge of all photos and  meet/greets. I was sitting at Mike's table at the after party eating a late night dinner and Mike could barely get two bites before someone else approached. Mike was actually loving it. He is a great guy and will talk to anyone anytime. I went to the bar to order tequila shots for the table...Mike insisted on Patron. Only the best. Mike shouted to  Heather Harde, the brainy beautiful CEO of TechCrunch, that he had managed to spend $1,000 in the first 45 minutes of the after party. He was loving it!

On the way back to the table I bumped into Steve Schlafman (Kraft Group), Eunice Chou (Massive), and Danny Moon (UpNext). By the time I finally got back to the table they were on the next rounds of tequila.

There were some press people and lots of bloggers at the event. Scott Kirsner (Boston Globe) was interviewing and doing video. I also talked to Nick Carr, Francois Gossieaux, Halley Suitt, Doc Searls, and Wade Roush.

I talked to over 200 people at the event and saw another hundred or so with a quick wink or nod. It was a wild night. Startup entrepreneurs were everywhere. Off the top of my head I remember talking to; Ben Saren (CitySquares), Reed Sturtevant (Microsoft Labs), Doug Levin (Blackduck Software), Shawn Broderick (TrustPlus), Jeremey Allaire (Brightcove), Matt Douglas (Punchbowl), Mike Ford (TownConnect), Pito Salas (BlogBridge), Chris Herot (Zingdom), Danny Moon (UpNext), Eduardo Saverin (Firefly Health), Michael Kokernak (BackChannel Media), Mark Pascarella (Gotuit), John Zib (GetMemo), Scott Durgin (OffshoreTP), Nikhil Roy (Spendview), Sarah Meyers (PopSnap), Sean Ammirati (FeedHub), Dave Evans (TheProgressBar), and Ted Morgan (Skyhook Wireless).

I know I talked to more people but after 5 or 6 Martinis my memory was a little foggy. Here is Jeff Bussgang (IDG Ventures) and me towards the end of the night.

Next stop for the TechCrunch Party tour is Los Angeles in December. See you there!

More blog coverage of the event at Chris Herot's blog, and Doug Levin. 

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Madonna and Radiohead dump record labels and go direct

Back in my Napster days there were several big name artists interested in working with Napster to sell their music directly to customers. They were tired of giving up the vast majority of their CD sales to the big record labels. Even the most successful music acts only got about $1 from every $20 CD sale.

Those artists who wanted to work with Napster were still under contract to the big labels. As soon as their contract expired they wanted to go direct with Napster and sell their music for $1 per song...a lot better that $1 per CD. Madonna, Green Day, Limp Bizkit, MC Hammer, Courtney Love, and several other artists talked to Napster about doing a distribution deal.

TechCrunch says "And the walls came tumbling down: Madonna dumps the record industry"  Madonna announced that she will not renew her contract with Warner Brothers. Last week, Nine Inch Nails announced that they would do the same thing. British music group Radiohead has taken the unusual approach of allowing their fans to buy their music direct and pay whatever they feel it is worth.

Napster was too far ahead of its time. See my earlier post Napster, The Inside Story, for more behind the scenes details. Napster wanted to be what iTunes is today, the online distribution site for all music. We wanted to discover new artists and target them to the users who enjoyed their genre of music. We wanted to work with big name artists who were ready to leave the big record labels. Unfortunately, we got sued out of existence before we could make it happen.

Today the world has changed, partly due to what we did at Napster. Today artists have the opportunity to take their music directly to the public. They don't need the record labels. The opportunity was always there, but the announcements from Madonna, Radiohead, Nine Inch Nails, and others makes the vision a reality.

Will the record labels adapt? Or will they continue to sue their customers and take advantage of their artists? They still have time to adapt, but I think I know how this story will end. If you are an investor...go short on music companies.

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TechStars in Boulder

TechStars is an entrepreneur boot camp similar to Y-Combinator's twice annual boot camp. TechCrunch reviewed the TechStars program earlier this year. TechStars selected 10 teams from a pool of more than 300 submissions. They funded them with up to $15,000 per team, provide office space, operational support, and mentorship from former entrepreneurs and business leaders. TechStars takes a 5% equity position in each company.

The teams moved to Boulder for the 3 month summer session. They work together in a large open office with each team working around a table of 2 to 4 people. There is lots of collaboration between the teams and evening group sessions several times a week. I was there earlier this week with Dan'l Lewin, Corp VP of Microsoft, and my colleague Dave Drach from the Emerging Business Team.

TechStars is the brainchild of Brad Feld, David Cohen, Jared Polis, and David Brown. They provided the money, offices, and mentor support for the companies.

The TechStars companies are all quite interesting. Here is a quick review of a few of the startups;

StickyNotes - A post-it-note type app for Facebook. One of the top 50 Facebook apps, over 250,000 users signed up in just two weeks.

IntenseDebate - A way to track and manage blog comments. It includes a reputation ranking system and usage statistics.

SocialThing - A way to consolidate all your digital content; blogs, photos, music, friends, links, in one place. Leverages the content on existing social sites and provides a layer of functionality on top of them.

MadKast - A new way to share (push) blog posts with friends. It is a widget that can be placed on a blog to allow readers to send the blog post to friends in their network.

BrightKite - Notifications via email, IM or SMS. The notifications are all about location or what they call "place-streaming". Streaming content about a "place" from a "place". It could be used for conferences, events, or public places.

EventVue - Social networking for conferences and trade shows. Allows attendees to find each other and network during and after the conference. In private beta.

I will check back with these companies at the end of the summer to see how much progress they have made. There is a very good chance that several of these startups will move up to the next level and be ready for seed stage funding.

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VC and Angel funding - How much is too much?

Marc Andreessen has a blog post about raising Venture Capital money, and the dangers of raising too little, or too much money. Marc believes you should raise as much money as you can, and then talk and act as if you raised too little. Good advice.

I have found significant differences in raising money from VCs versus Angels. Raising money typically falls into distinct stages.

Seed Stage -  Seed Stage is "idea stage" meaning pre-revenue, pre-product, and many times even pre-demo. Friends and Family normally fund the Seed Stage. Some Angels will jump in here but only if they know you, or the business, very well.

Startup Stage - At Startup Stage you have a demonstrable product, some beta users, and maybe even a little revenue. The product is not complete, the revenue model is untested, and the team is in the embryonic stage. Angels will jump in at this stage and fund between $500K and $2M. They may give you the money in several installments based on meeting milestones like shipping V1.0, converting some number of beta users into customers, or hiring your first sales person. Some VCs will do Startup Stage funding but typically only if they know you from a prior company, or the VC knows the business segment from a prior life.

First Round Funding - Most VCs want to get involved when the company has a product, a significant number of users, early adopter customers, and a proven revenue model. They like to be the first "institutional" money in the deal, and dictate the terms of the Series A investment. They want the Friends & Family and Angels to hold convertible notes with little or no conversion preferences or warrants. VCs like to invest $2M to $10M in the first round.

How much should you raise, and who should you raise it from? It really depends on the stage of your company described above. This is the single most important thing to remember when raising money, always raise as much money as you can at each stage. You will never look more attractive to investors than you do right now...regardless of stage. Huh? What do you mean? I mean, don't try to raise Seed Stage money twice. You will never look more attractive to F&F investors than you do right now. Don't try to raise Angel money in two rounds. Raise as much as you can from Angels in one round at that stage.

Raising money is very time consuming, and sometimes depressing. It takes precious time away from building your business. Put the time in to raise all the money you will need to get to the next stage, and then get back to work.

How much is too much? Yes, you can raise too much. But take Marc Andreessen's advice; raise too much and then think, talk, and act, like you raised too little. Many startups fail because they raised too much money and start acting like they have it made. They don't. I once worked for a startup that raised so much money they were making charitable donations before they were even cash flow positive. Crazy! Here are Marc's points on the danger of raising too much money;

• Dilution - raising too much money causes equity dilution at low valuation points.
• Liquidation Preferences - these preferences can significantly raise the price necessary for a profitable exit via M&A or IPO.
• Cultural Erosion - Too much money makes a startup lose that hungry attitude. As Marc says "a culture of complacency, laziness, and arrogance."
• Hiring too many people - It is easy to hire too many people when you are sitting on a pile of cash. Until you are cash flow positive the CEO should personally justify every single hire.

How much is too little? The simple answer is if you need to raise money again before you reach the next funding stage...you have raised too little. Don't stop fund raising until you have reached your goal. Accept more money over your goal if it is there at the same terms and conditions. Don't worry about giving up too much equity at an early stage. If the company is successful you will be very rich. If it isn't successful then holding 60% versus 30% won't matter anyway.

Most companies fail because they raised too little money...not because they raised too much. Of course most companies fail for reasons that have nothing to do with money. Just buy yourself some "insurance" and "run way" by raising plenty of money from all your sources at each stage.

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Tech vision blurs after 30- Dave Winer vs Fred Wilson

Ask any eye doctor and they will tell you people start to lose their vision in their late 30s and need reading glasses by 40. It is true in technology too. Dave Winer disagrees with Fred Wilson on this. Technology visionaries lose their "vision", but not their brains, by the time they hit 40.

There are rare exceptions. Steve Jobs comes to mind. But if you look at the most innovative startups today, or even 20 years ago, they were mostly started by people in their 20s. Facebook, MySpace, YouTube, Google, and lots of others were started by "20-somethings". Back in the Web 1.0 era, Netscape, Napster, Paypal, Amazon, and many others were again, started by "20-somethings". And way back when...Apple, Microsoft, Sun, Lotus, and many others were started by "20-somethings". It is hard to remember a significant "new vision"startup that was started by someone in their 40s.

Young people have vision for what is possible, and are not blinded by "knowledge" of what is not possible. Young people are great at starting things, but in most cases, not so good at building big businesses. There are of course exceptions here too. Steve Jobs, Bill Gates, Scott McNealy, Mitch Kapoor, and a few others were great visionaries AND good at building large sustainable businesses.

Older, more experienced people ( I am an old guy) are typically better at taking a startup idea and building it into a business. Older people are great at understanding the potential of "paradigm shifts", but not great at seeing them beforehand. Just as our eyesight fails us in our late 30s and 40s, our vision, or ability to see and predict the future also fades. Once a young visionary brings the idea into focus, us older guys quickly understand the implications and how to capitalize on it.

Don't get upset about it. It is just the natural order of things. Yes there are exceptions. Fred Wilson, and most VCs, are just watching the trends...and they are pretty clear. Investors are looking for companies with young technical visionaries supported by older business and marketing guys. That is a winning combination.

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