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SXSW Live blogging: Who Needs Venture Capital?">SXSW Live blogging: Who Needs Venture Capital?

March 15, 2010  |  Startup  |  View Comments
This is a live post from a SXSW panel on Ven­ture Cap­i­tal, March 15th, 2010

Only a frac­tion of busi­ness financ­ing comes from Sand Hill Road. Yet entre­pre­neurs still obsess over tra­di­tional big meeting/big money Sil­i­con Val­ley ven­ture cap­i­tal. This heated panel debates what types of com­pa­nies actu­ally ben­e­fit from VC and reviews con­crete exam­ples of alter­na­tives to tra­di­tional ven­ture capital.



Pre­sen­ters
53203_thumb Mitch Lasky
Bench­mark Cap­i­tal
53204_thumb Mike Trotzke
Sprout­Box
53205_thumb Jolie O’Dell
Read­WriteWeb
53206_thumb 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.

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Retrospective of South Florida’s startup community

RefreshMiami's monthly meetups gather 130 participants on average and have become a hub to meet new people, create friendships, and find new job opportunities.

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SXSW 2009">Spending the week at SXSW 2009

I'm honored to share the stage at SXSW 2009 with co-panelists Peter Imbres, Scott Monty, and Andy Carvin for a talk about "Digital Tsunami: Breaking News at Breakneck Speeds":

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Celebrating another refreshing year!

RefreshMiami

Last night we cel­e­brated another great year of Refresh­Mi­ami mee­tups (slideshow here).

Dur­ing the year, our mem­ber­ship dou­bled as we acco­mo­dated about 35 pre­sen­ta­tions by South Florida new media star­tups, entre­pre­neurs, and free­lance pro­fes­sion­als. Our mee­tups were attended on aver­age by 50 peo­ple, with some events draw­ing about 100. We’re par­tic­u­larly grate­ful to Yahoo! His­panic Amer­i­cas and to Brikolodge for host­ing most of our mee­tups, as well as to our spon­sors for pro­vid­ing the catering.

What’s in store for next year?

As the new media com­mu­nity con­tin­ues to grow, we plan on pro­vid­ing more ser­vices through­out the year. This means we’ll look into incor­po­rat­ing as a non-profit early in the year, build­ing a team, and set­ting objec­tives. It has been a reward­ing adven­ture so far, and we look for­ward to our next stage of growth.

Thanks for tak­ing part!

Catalyzing sea change

By focusing on the end goal of innovation and transformation, we are not limited to social media solutions - we can think differently about business processes, branding, marketing campaigns, customer support, hiring, training, partnerships, sales and other aspects of operations even.

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BlogOrlando 2008 … third time’s the charm

blogorlando

Blo­gOr­lando gets bet­ter each year, I’m very glad I went. I of course enjoyed recon­nect­ing with friends who flew in from across the coun­try, see­ing the Orlando tech com­mu­nity again, and meet­ing new people.

paula berg jake mckeeOne of the high­lights was get­ting first­hand case stud­ies from the teams that manage(d) social media at major cor­po­ra­tions: Jeff Ruben­stein and Josh Hal­lett pre­sented the Sony Playsta­tion strat­egy; Paula Berg spoke about suc­cesses and learn­ings at South­West Air­lines; and Jake McKee recapped his expe­ri­ences at Lego.

The sched­ule was full of good top­ics, mak­ing it hard to choose which track to follow:

leah jonesLeah Jones of Edel­man Dig­i­tal pre­sented advanced search tech­niques, includ­ing the search engines and Boolean searches she makes. Here’s her pre­sen­ta­tion on Slideshare: “Going beyond Google”.
nik wilets @tiburonNik Wilets, aka @tiburon, explained the dif­fer­ence between a pho­tog­ra­pher and a pho­to­jour­nal­ist, and had great exam­ples of his own and other’s work. He was later fol­lowed by Etan Horowitz from the Orlando Sen­tinel, who spoke about the use of Twit­ter in Jour­nal­ism.

phil gomes Phil Gomes, also of Edel­man, shared his expe­ri­ences, tips, and tech­niques on giv­ing inter­nal edu­ca­tion on social media within the large PR firm.
spike jones geno church Spike Jones and Geno Church gave excel­lent pre­sen­ta­tions on “WOM and social media” and “Move­ments, activism, and social media”, respec­tively. Most inter­est­ingly, Geno spoke about cre­at­ing and build­ing the Fiska­teers com­mu­nity, for one of the old­est com­pa­nies in the world, Finnish scis­sor maker Fiskars. Com­mu­nity is not about the scis­sors, it’s about the higher purpose.

blogorlando I’ve been going up to Orlando tech events, and each time it’s reas­sur­ing to see the tech com­mu­nity grow and orga­nize itself. They’ve made great progress in the last few months since Bar­Cam­pOr­lando, which was the cat­a­lyst for many of the groups and ini­tia­tives. Pic­tured are Alex Rudloff, Ryan Price, and Gregg Pol­lack, who sum­ma­rized the his­tory and the many things going on. Here’s a video of their 30-minute preso.

I also saw David Alston from Radian6 speak about brand mon­i­tor­ing (dis­claimer: I co-founded StartPR), but unfor­tu­nately missed David Parmet’s ses­sion on edu­ca­tion and Jake’s ses­sion on identity.

Over­all, it was great to meet up with such bril­liant and engaged peo­ple, and best of all, it hap­pened in Florida ;)

Update: Some of the ses­sions are archived here on ustream.

MobileMonday Miami at Myxer

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WOMMA">Miami Blogger Dinner for WOMMA

May 10, 2008  |  Events  |  , , , ,  |  View Comments

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RefreshMiami turns two!

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SXSW">A Conversation with Michael Eisner and Mark Cuban at SXSW

March 11, 2008  |  Startup  |  ,  |  View Comments

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