Archive for the ‘raising cash money’ tag
I wrote several months ago that everyone should get funded, and the growth of philanthropy-driven angel funding will fuel it. A few things I’ve seen over the past week have taken my thinking to the next level.
It has become extraordinarily difficult to change culture through pure art. New forms of art are no longer shocking to mainstream culture as Pointillism was to the late 19th century or Cubism to the early 20th. Few know this better than Carter Cleveland of Art.sy, who made a powerful point to me last week: Those who wish to fundamentally change culture in the 21st century — and those who wish to fund those changes — must look toward entrepreneurship.
Over the past fifteen years, startups have been catalyzing global cultural changes that had previously been the realm of artists. Facebook is the perfect example, a company nominally driven by a desire to “change the way people interact”, a phrase that could just as easily be spoken by a conceptual artist. And Facebook has succeeded in changing the way over five hundred million people interact, whereas an artist with a similar goal would be lucky to be featured in a design magazine or score a cameo on the evening news. One could argue that it’s all art, but the medium has shifted from canvas to Delaware C Corporations. Fifty years ago, repressive regimes banned books and modern art. Today they ban Facebook and Twitter.
This thought has been stewing in my head for a while, and Yuri Milner’s commitment to YCombinator drove it home. Yuri has fantastic returns — his three investments thus far are Facebook, Zynga and Groupon — but I’m convinced he’s playing by a different set of rules. Arrington first wrote about US startups as a vanity purchase for wealthy Russians more than a year ago, and there are surely enough wealthy Russians to fill DST’s coffers without forcing a strict focus on returns. But I don’t think DST is an oddball clique — rather, I see them as the model for the future a venture capital. A future in which super-wealthy individual limited partners are driving a fund that is based on equal parts vanity, philanthropy and financial returns.
This is a self-reinforcing trend: as more investors look to startups as a “Broadway-like” investment — that is, something that is just as much about status and cultural change as financial profitability — ever-adapting entrepreneurs will build companies that emphasize these kinds of “softer” returns. As the positive feedback cycle accelerates, we’re likely to see an entire class of investors and entrepreneurs styling themselves as patrons and interactive artists, respectively. This isn’t to say that these entrepreneurs will be building nonprofits; rather, supernormal returns are an integrated piece of the startups’ aesthetic appeal to culturally and financially savvy investors.
This is as long of a prediction as I’ll make here. I don’t think this is a trend we’ll see culminate in the next 5 or even 10 years — this one is going to take thirty years to fully play out and the effects will be felt for decades if not centuries. Entrepreneurship is the new art, and it is a Good Thing — both for entrepreneurs and our society as a whole.
Editor’s Note: This post was created in collaboration with Chris Paik, who was invaluable in helping me crunch the numbers. He’s looking for an internship in venture capital, so if you like this post, get in touch with him via his blog.
Lots of you enjoyed my post a few weeks ago on buzz and fund size among NYC venture firms. But why not take it further? Why not use all the data in Crunchbase of financings of NYC companies over the past five years?
So that’s what we did. And we got data for 814 venture financings since March 2005 worth a total of $3.1 billion. We were careful to exclude angel and strategic investors, since data around those deals are poor and would make the results harder to parse.
To start, let’s look at all venture firms that have completed over 7 financings of NYC-based companies in the past 5 years. Here, you can see how they stack up based on number of deals done:
Keep in mind that there’s a long tail here — this chart represents 300 total financing events, only 37% of all the venture financings of NYC-based companies in Crunchbase. The rest of financings were done by other firms.
But this is just parsed by the number of financings — with no thought given to the size of the deals. Thus, let’s look at the (relative) deal size by the firms listed above when investing in NYC companies:
You’ll probably notice that there aren’t any labels on the Y-axis. In brief, I don’t trust the absolute data here. It’s often impossible to distinguish the relative contributions of investors in a syndicated deal. For example, if Union Square does a $1 MM seed deal, there isn’t any ambiguity there. But if the company’s next round is a $10 MM round syndicated among two growth capital firms and Union Square, there’s no way to really know how much each firm invested. However, it is probably safe to say that the growth capital firms do bigger deals than Union Square, since they first joined the syndicate at a later (bigger) round. Thus, the relative data is accurate, but the absolute numbers are highly questionable.
Since we selected these financings based on the zip code of the funded company’s headquarters, we can drill down a bit further and draw some really interesting conclusions. Specifically, where are funded companies? The following map looks at two factors: the number of financings in the zip code (the color of the dot) and the total amount of venture money invested in the zip code (the size of the dot):
There are certainly some surprising things here, at least to me. This entire map seems to be shifted a bit further north than I expected; are there really that many well-funded startups in Murray Hill? I also expected to see a bigger presence in TriBeCa.
There’s a lot of data here, and I’m sure there will be follow-up posts — especially as we dive into the data on the types of companies that are receiving this financing.
Editor’s Note: This piece was originally published by Greg Costikyan on November 28th, 2007 and dealt with his experiences raising funding for Manifesto Games. I think it’s a wonderful piece that still rings true today, and I’m reblogging it with his permission here.
As a teenager, my subculture wasn’t “punk rockers” or “hippies” or “young Republicans,” but science fiction fandom. I tend to view other subcultures, therefore, from a sort of anthropological standpoint, noting similarities and differences from my own “native” culture. I understand “the science convention” as one of the cultural practices of my own tribe, and therefore perceive other similar cultural practices–such as the trade show, the industry conference, the acadamic conclave, or, in the case of today’s post, the venture conference–as interesting cultural variations on that basic motif.
Earlier this week, I attended the New England Venture Summit–my fifth conference of the venture-investing tribe as an attendee, my third in a money-raising capacity, and the second at which I presented.
As with conferences in other cultures, the focus of the event, which takes place typically over one or two days, is the agenda, a series of speeches and panel discussions. Unlike most other such events (e.g., the science fiction convention or the industry conference), the Dionysian aspect is downplayed–there may perhaps be private dinners sponsored by one VC firm or another after the day’s event itself, but the conceit of the participants is that they are there purely in the Calvinist pursuit of worldly wealth, so that open partying would diminish their own respectability in the eyes of the participants with whom they most desire to build social credit.
The organizers of these event are profit-making enterprises, who charge fairly stiff fees for participation, and target three sorts of potential attendees: entrepreneurs seeking capital; venture investors; and service firms. Under the rubric of “service firms” are included lawyers, accountants, headhunters, providers of outsourced HR services for small businesses, and the like. My impression, in fact, is that half or more of the revenues that such events produce are derived from service firms, both from the (higher) attendance fees they are charged, and through sponsorships.
The events on the agenda are of two types: panel discussions, usually among VCs, and usually moderated by someone from a service firm (who presumably has paid for a sponsorship in another context); and investor presentations.
Panel discussions are common to the conferences of all of the subcultures considered in our current study, but (in all cultures) they vary enormously in how interesting they are. In the worst case, you have as a topic for discussion something that has already been thrashed to death repeatedly at previous events, and a moderator who poses excruciatingly dull questions, eliciting rote answers from the panelists. Whatever your subculture, I’m sure you can bring to mind any number of these, from events you’ve attended. In an SF convention context, I would be very happy never to attend another panel on “Gender in Science Fiction” or “Breaking Into Print.” (Although even in these cases, creative panel members can overturn the conventions; I am unlikely ever to forget Michael Swanwick [writer] on a “Breaking Into Print” panel discussing his relationship with Gardner Dozois [editor], and saying “There’s a reason they call it ‘submission.'”)
The basic problem with the venture conference panel is that the conditions under which they are created mitigate against anything of the slightest interest ever being said. They exist to motivate the attendance of VCs, who may be flattered to participate; to reward service firms for contributing money (by allowing them to provide the moderators); and to attract the interest of entrepreneurs, who may reasonably be expected to find what potential investors say of interest. But the choice of topic is inevitably anodyne (“Emerging Trends” — can’t pass that one up!), and since the moderator is from a service firm, which has an interest in sucking up to both investors and entreprenuers, he is extremely unlikely to ask challenging questions, and is likely to stick to the equally anodyne. E.g., “Which is more important when you’re looking at a company–the finances or the team?” — a question at this actual conference, to which the only honest response is “Which are you, a moron or an idiot?”
(Oh, if you care –So let’s do a gedankenexperiment. 1. My team is Bill Gates, Thomas Alva Edison, and Henry Ford, and my business models is, we sell hot dogs at a loss and make it up on volume. PASS!
(2. My team is three heroin addicts who haven’t bathed in a week — but — wait! Billion dollar oppor… PASS!
( You tell me. Which is more important? The finances or the team?)
So from an entrepreneur’s perspective, there’s only one reason ever to attend these things: To put a face with a name, and know who to button-hole later.
The company pitches are the real meat of this kind of event. Typically, over the course of an hour or ninety minutes, a series of entrepreneurs get up, each allocated something between 6 and ten minutes, to pitch their company. The inevitable tool is the Powerpoint presentation (occasionally you’ll see someone using OpenOffice Impress, and good for them); this is jejune in its own right, and some day I’ll have the guts to do something completely offbeat, like hire a team of mimes and jugglers to provide visual representations of what I’m pitching.
There’s usually a ‘mandatory’ training session the day before, in which entrepreneurs give their pitch to a handful of venture-experienced people and get advice and feedback; this is actually useful, in many cases, since it’s surprising how many entrepreneurs show up under prepared, and quite often advice like “nobody’s going to be able to read 12 point type on your slide, no more than 4 bullets per, thanks” or “I still don’t have a clear idea what you do” is just what they need. For your ultimate six minutes of exposure, it’s a bit of a pain to take half a day off to watch painfully amateurish presentations from other entrepreneurs, but it’s still almost always worth it, even if you’re pretty polished. It never hurts to rehearse before a critical audience. (I didn’t take advantage of that this time, and it was a mistake not to do so.)
Watching entrepreneurs pitch is painful, because each of them has taken months of work and passionate dreams and a universe of ideas and tried to distill them down to six tight minutes. And it’s painful, because so much of what they’re pitching is jejune or just dumb; a minor tweak on the delivery of mobile content, a better way to sell real estate, a mechanism for making mobile games even less interesting than they are already by making them “free” and advertising supported. (Advertising supported inevitably means “dumbed down to the lowest common denominator.”) “Secure DRM,” hah. A mechanism for reducing cigarette theft at convenience stores.
All the kinds of things that maybe might make money, but my god; it makes you despair of capitalism. Is this the best that the Promethean creativity of the market can produce?
But to get back to the anthropological analysis, all conferences, of whatever type, have three purposes, though they vary on which they emphasize: to impart information; to build social ties; and to do business. For me as a teenager, the science fiction convention was first about information; it was an enormous thrill to hear the writers I admired speak, and I learned a great deal about writing, and the business practices of publishing. Later, it served a business purpose; promoting my work in the field, and establishing relationships with editors. And these days, on the rare times I attend one, it’s primarily social–catching up with old friends.
In terms of imparting information, I would suggest that “the venture conference” is a poor medium, except for very naive entrepreneurs. If it has any value as a social event, it is for venture investors (who often cluster and talk shop with each other, even as the entrepreneurs scan badges and try to figure out how to start a conversation with them–the entrepreneurs have little to say to one another). Which leaves the business function, and since these are events built around a business subculture, that is, or ought to be, their main purpose, redeeming the fact that they don’t do so well on the first two scores.
I would argue, however, that they don’t work particularly well in a business context, either.
Let’s start with venture investors. A typical venture capitalist spends the bulk of his days listening to pitches from entrepreneurs. Just as fiction editors are up to their eyeballs in slush, a VC has seen so many Powerpoints he has trouble remembering which is which, and probably has nightmares in which “the opportunity” and “go-to-market strategy” chase him screaming off a cliff, the jaws of negative EBITDA spreading threatening below.
Now let us say that you are, to pull things more or less at random, a VC who invests in, oh, the enterprise software space, specializing in expansion capital to already-established firms, located in Boston and almost never investing in companies farther than drive-distance.
Your expectation–and a reasonable one–is that anyone who has a company dealing with enterprise software, with some solid base of revenues, and within drive distance of Boston either knows you, or knows of you, or will ask around until he finds someone who does know you, and you will eventually see his business plan. Or if not, he can’t be a very competent entrepreneur, because he damn well should be able to find you.
So you learn of some venture conference, in the Boston area, where umpty-dozen companies will given a six minute pitch.
The basic thesis behind the venture conference is that you should be all excited to attend, because here you’ll get quick exposure to umpty-dozen potential investment opportunities, and all in the space of a day! Efficient use of time, yes?
Out of those umpty-dozen, maybe two will fit your investment criteria, and if they were semi-competent, they’d find you anyway.
So… Maybe you send an associate. You certainly don’t go.
From an entrepreneur’s perspective, the supposed appeal to the venture conference is this: I’m pitching to a room containing maybe 200 people, all interested in venture investing, and even though there’s a fee attached (and maybe travel and a hotel room), and even though it’s a couple of days out of my (and maybe my senior staff’s) life, it’s a more efficient way to reach a lot of potential investors at once!
Well–no. That room of 200 people is maybe 25% other entrepreneurs waiting their turn or listening to other pitches to get a better sense of how to polish their own, and maybe 50% service folks who actually want to sell you stuff, and maybe the other 25% are investors of one kind or another. Of whom the vast majority would never invest in whatever it is you’re pitching. And of the handful who remain, almost all are so junior that unless they go back foaming at the mouth with excitement, it doesn’t really help.
You would be far better off staying at home, figuring out the right VC firm and the right person there, and figuring out how to network to them, so your submission doesn’t fly over the transom and land in the “slush”, but gets a sympathetic read.
As Michael Swanwick said, “there’s a reason they call it submission.”
Which is a nice pat way to end it, but leaves two obvious questions, I think. I’ll take them in order.
1. “So… How did you do?”
Ehn. I think the Powerpoint itself was pretty strong, but this is the first time I’ve tried to do this with a partner; Nathan took half the slides, and I the other half. We both floundered a bit, and were not as crisp, clean, and confident as you want to be in this context. We could have used another few hours of rehearsal to get it down pat. We didn’t, for two reasons; one, Nathan and I live in different cities, and our time for rehearsal was three hours the night before. And second, perhaps, I’m skeptical enough about the value of the whole enterprise that I didn’t make it enough of a priority for us to get together with time to do the work we needed to do. Penny wise and pound foolish; if you invest in the money and time to do this at all, you ought to do it well. I take responsibility.
Not that I think we made idiots of ourselves, but we could certainly have been better.
2. “Would you do it again?”
I think I’ve just made a strong argument for why this kind of thing is useless. But… Yes. And probably will. For two reasons.
First, the discipline of trying to distill what you want to do down to six minutes and a handful of slides of worthwhile–and refreshing, in its own way. More than that, distilling it down to a business case; it’s obvious, I think that I’m doing what I’m doing for a slew of reasons, many of which have nothing to do with a business case, and if I were doing a six-minute presentation for an audience of, say, game developers, it would look very different. But if I can’t make a strong business case, I shouldn’t be trying to do this as a business–an art project, perhaps, or a non-profit enterprise. But if I can persuade myself that this makes sense in a business context, that’s self-motivating–and an excellent framework to make a case to people–beyond the context of the venture conference–who are utterly motivated by monetary return, and don’t care as passionately as I about the larger issues.
Second… Even if, as I’ve argued, the venture conference is not an efficient fund-raisng tool, if you’re out looking for money… Well, it’s just one of the things you have to do.
Part of the subculture, you know.
Greg’s original writing can be found here.
I meet a lot of entrepreneurs and hear a lot of ideas and business plans from all across the board. Most have — at the very least — a kernel of a good idea in them. But many don’t know what kind of business they are. There are an unbelievable number of entrepreneurs focused on technology when their entire business model is predicated on the success or failure of a marketing campaign, for instance.
This isn’t to say that technology isn’t important for those businesses, but rather that it isn’t the core differentiator that interests investors and makes or breaks the company. If you are running a sweepstakes business, for instance, I don’t want to hear about your awesome Rails architecture. I want to hear about how you are going to acquire users for $1.50 and monetize each for $3.00. Sweepstakes (in most forms) is a marketing business, and that is really what a potential investor or partner wants to hear about.
I like to put startups in three categories as defined by the core factors driving their success:
Technology Businesses: The core differentiator of your business is your technology. Generally, your company either (a) has real intellectual property around your technology and/or (b) is founded by leading engineers in the field.
Marketing Businesses: Your business is driven by its ability to acquire and retain users/customers more effectively than your competitors.
Relationship Businesses: Your business’s success or failure will be determined by your ability to forge lasting relationships with customers and/or strategic partners.
I’ve rarely found businesses that are truly driven by some combination of those factors. In most, one factor greatly outweighs all the others. And there are patterns behind misconceptions — most commonly, first-time entrepreneurs overweight the importance of technology as opposed to marketing or relationships. This makes sense, as an entrepreneur’s first goal is often to get a product up. But products are hard to build real differentiation around unless you are doing really innovative stuff, like building new database backends or search algorithms. In most consumer internet businesses, marketing is the most critical component. In B2B plays, relationship-building tends to make the biggest impact. And in general, progress on the core differentiator is what VCs mean when they talk about needing to “see traction.”
Want to generate awesome startup ideas? An interesting trick is to identify immature industries where the leading players are focused on the wrong differentiators. My own LabApp is an example of this — while the existing (immature) players are focused on relationship-building, I happen to believe that software commercialization is a marketing-differentiated business. As with all startups, time will tell if LabApp is on the right track, but looking at “differentiation-based” pivot points can be a great way to generate innovative and revolutionary products in immature industries. Some off-the-cuff ideas:
1) Take a relationship-based approach to marketing-driven social games to piggyback off of major brands’ name recognition. This is similar to what Arkadium is doing to much success with the social advergaming concept.
2) Use a marketing-driven model to gain independent adoption to a new CRM software product from the bottom up. Almost all SaaS CRM providers are currently relationship-driven, which leaves open a massive long tail of independent salespeople.
3) Use technology differentiation to pry government IT contracts out of the hands of bloated, relationship-driven contractors. Easier said than done, but someone’s gonna make a lot of money from this in the next 15 years.