SXSW Live blogging: Who Needs Venture Capital?

	Mitch Lasky Bench­mark Cap­i­tal Mitch Lasky has spent more than two decades in the mobile gam­ing, new media and inter­ac­tive enter­tain­ment busi­ness. Prior to join­ing Bench­mark Cap­i­tal, Mitch served as exec­u­tive vice pres­i­dent of Mobile and Online at Elec­tronic Arts. Pre­vi­ously, he was chair­man and chief exec­u­tive offi­cer of JAMDAT Mobile, Inc, the lead­ing global pub­lisher of wire­less enter­tain­ment appli­ca­tions, which was acquired by EA in 2005. Prior to JAMDAT, Mitch served as gen­eral man­ager of eCom­pa­nies Wire­less LLC, an Inter­net busi­ness incu­ba­tor. He also spent five years at Activi­sion, most recently serv­ing as exec­u­tive vice pres­i­dent of World­wide Stu­dios. In that role he was respon­si­ble for prod­uct devel­op­ment, busi­ness devel­op­ment and global oper­a­tions. Ear­lier in his career, Mitch prac­ticed law, worked at the Walt Dis­ney Com­pany and started a mas­sively mul­ti­player online game company.
	Mike Trotzke Sprout­Box Mostly, I’m into build­ing things: com­pa­nies, web apps, con­sen­sus, rela­tion­ships. I’ve been lucky to do a lot of what I like. I started my first com­pany while in col­lege. Spun off another one and sold it to a large com­pany. Before that, I trav­eled around mak­ing audio record­ings of march­ing bands and did media for polit­i­cal cam­paigns. I’ve had fun mak­ing money. Design­ing and cod­ing cool web apps is a blast. I’m moti­vated by cre­at­ing things that have value to lots of users. While I’m squarely a geek, I don’t cling to being any par­tic­u­lar type of per­son. I have a very entre­pre­neur­ial mind set and focus a great deal on busi­ness strat­egy, sales &mar­ket­ing, and com­pany cul­ture. I have an awe­some wife, Bets, and an evil cat, Thomas. Not sure why Bets puts up with me or why we put up with Thomas, but we all seem to get along pretty well. My cowork­ers are many of my friends, and I don’t draw a firm line between work and per­sonal life. I’m fired up to meet and help other peo­ple in the spot I was 12 years ago: just start­ing out. Feel free to con­tact me any­time, or stop by the Alley Bar in Bloom­ing­ton any Thurs­day after work. I’ll be there.
	Jolie O’Dell Read­WriteWeb Jolie O’Dell is a tech jour­nal­ist for Read­WriteWeb. She’s been work­ing at star­tups and news pub­li­ca­tions for more than 10 years. She lives in San Francisco.
	Dave Mcclure 500 Hats

Chris Wanstrath, founder of GitHub

Ses­sion:

To get funded at the Pow­er­point stage, you prob­a­bly need to have a track record with VCs. Oth­er­wise you’ll need a func­tion­ing pro­to­type or more, like pay­ing customers.

There are com­pa­nies that shouldn’t be rais­ing ven­ture cap­i­tal, and there are many that aren’t going to get funded because demand far out­strips sup­ply. When you build a busi­ness, ven­ture cap­i­tal should be a sec­ond order con­sid­er­a­tion. Build a solid busi­ness first and think about ven­ture cap­i­tal sec­ond … your busi­ness should not be about rais­ing the money. On the other hand,there are com­pa­nies that do require ven­ture fund­ing, because they do need to get the servers and band­width and employ­ees to be able to scale.

“Don’t write busi­ness plans. It’s a f*ing waste of time” –Mcclure. For Dave, the trust fil­ter is the most impor­tant, and he only con­sid­ers star­tups who have ref­er­ences in common.

Wanstrath did not take Ven­ture Cap­i­tal for Github. It did take a lot of money to set the com­pany up, but they found other ways, includ­ing friends and fam­ily. They made a lot of busi­ness deals for servers, maxed out credit cards and bor­rowed money and gen­er­ally did what­ever it took. They did not feel a $10 mil­lion val­u­a­tion was fair when they were prof­itable mak­ing $1 mil­lion in rev­enues. They cer­tainly did not want to take on a VC that was going to start set­ting their direction.

Lasky sees a lot of great com­pa­nies that are not good ven­ture invest­ments, because the return pro­file does not fit the time or ratios that VCs are look­ing for. For exam­ple, a $500 mil­lion fund will invest in 30 to 40 com­pa­nies and are look­ing at 3X return on cap­i­tal in 10 years. So they’re look­ing for $250 mil­lion exit for all com­pa­nies, or $750 mil­lion with a 2/3 fail­ure rate. Smaller VCs with funds under $100 mil­lion can tol­er­ate smaller exits. An exam­ple would be Mint, which is a com­pany that did need ven­ture backing.

Huge exits are not the median sce­nario by any means and the ven­ture cap­i­tal game has a huge cor­rupt­ing effect on star­tups. A bet­ter approach is to build a cool busi­ness and then things will hap­pen. For most busi­nesses, the core prod­uct can be built by two peo­ple in eight to ten months. This means a $50k to $100k invest­ment, which is not VC; it’s per­sonal sav­ings and friends and fam­ily. The cru­cial seed phase is $250k to $1 mil­lion, where it’s really hard to boot­strap to that size. The best thing to do is to look at VCs with funds under $100M.

The aver­age Tech­stars deal is invest­ing $15k to $30k for about a 7% to 10% stake on a $300k val­u­a­tion — but they bring huge value in their men­tor­ship model. How­ever, this is good for stu­dents out of col­lege, because they have no savings.

The typ­i­cal sce­nario is tak­ing a 20% to 40% dilu­tion when fund­ing through VCs, and prob­a­bly more.

There are plenty of lifestyle busi­nesses online where the founders can make $1 mil­lion to $2 mil­lion per year and live hap­pily ever after with­out hav­ing a big exit plan.

When pitch­ing ven­ture cap­i­tal, you have to sift through the good, the bad, and the crim­i­nally neg­li­gent. Weird term sheets, dis­hon­esty, etc., are the pit­falls to watch out for. Ven­ture cap­i­tal­ists fund the expan­sion of the busi­ness in antic­i­pa­tion of upcom­ing rev­enues. The idea is not to fig­ure out new ways of spend­ing the busi­ness; the fun­da­men­tal con­cept is to spend the money in ways that grow the busi­ness. VCs are will­ing to fail, whereas banks are not.

What are the alter­na­tives to VC fund­ing? What do you do if your friends and fam­ily are broke?

The impor­tant thing about alter­na­tives is that there is no indus­try based around boot­strap­ping, like there is around ven­ture cap­i­tal. First, fig­ure out what you need and then start cut­ting. Do you need PR? Do you need an office? What can you do away with? After that, fig­ure out where you can get the money from. Tak­ing money from par­ents or going into debt is a big deal in case of failure.

A real­is­tic alter­na­tive to boot­strap­ping is rais­ing $100k to $2 mil­lion for up to 20% of the com­pany, with an exit at $10 million.

Q&A:

Euro­pean entre­pre­neurs a decade ago were pissed off about how dif­fi­cult it was to raise money, because of hugh risk aver­sion. The Amer­i­can model of risk is migrat­ing over and things seem to be get­ting bet­ter for Euro­pean startups.

Cus­tomer financ­ing with upfront dis­counts, cus­tomer receiv­able financ­ing or fac­tor­ing, asset-backed leas­ing are some other alter­na­tive strate­gies to help man­age the cash flow and off­set the need for fundraising.

Wanstrath would not boot­strap a con­sumer web com­pany or a con­sumer app.

Wanstrath advises open­ing up as many dif­fer­ent rev­enue streams as pos­si­ble. Offer peo­ple many dif­fer­ent plans and ways to pay you for your services.

For Lasky, the dif­fer­ence in being there six months early meant a $400 mil­lion advan­tage in val­u­a­tion over the sec­ond mover in his market.

The ven­ture cap­i­tal indus­try has to con­tract. There are too many firms with very mediocre results. Part of the rea­son is there are more mature com­pa­nies doing deals earlier.

If you have 20% equity in your startup and are look­ing for a $10 mil­lion pay­out, then your sweet spot for exit must be around $50 to $75 million.

whoneedsvc, ven­ture cap­i­tal, boot­strap­ping, fundrais­ing, startup, finance, busi­ness plan, sxsw, sxswi