VC

You’ve Raised Venture Capital, Now What?

By Mark Evans in Startups, Venture Capital No Comments Tags: , , ,

For many startup entrepreneurs, raising their first venture capital round is like winning the Super Bowl. It validates what they’re doing, their vision and all the hard work that’s happened. When the deal is signed, there are lots of high fives and the champagne flows. It’s good times, baby!

The funny thing is you wake in the morning with a whack of cash in the bank, and realize the work has just started. For all the effort that happened pre-deal, there’s even more work ahead post-deal because there’s another party (or parties) who have a vested and financial interest in how you operate the business.

For some entrepreneurs, it can be an abrupt wake up call. Suddenly, there are board meetings, regular updates to be filed, plenty of questions, and performance reviews. If you thought there was pressure before, it’ll come in waves now.

At the same time, entrepreneurs also need to get their head around the money. While it is being invested to grow the business, it will eventually run out, even if it does seem like a large amount at the beginning. I worked with an entrepreneur who seemed to think the money would last forever and, as a result, start spending it on products and services that weren’t a priority.

Here’s funny thing about raising your first round of venture capital: investors are happy to give it to you, and they’re happy to see you spend it.

Why? It’s because they know it’s likely you’ll to come back for more if the business shows traction. While there may be more suitors but your initial investors will more likely be involved and be assertive in making sure the deal rewards their initial investment.

The bottom line is raising startup capital is a terribly exciting and rewarding experience, particularly given it is like winning a lottery ticket in many ways. At the same time, it’s the end of one stage and the start of another with just as many challenges and demands.

More: For another angle on raising capital, Mark MacLeod has a good post looking at burn rates versus runway.

Is Having Too Much Money Bad for Startups?

By Mark Evans in Startups 5 Comments Tags: , , ,

In a post yesterday on StartupNorth, iNovia Capital’s Chris Arsenault put the spotlight on three large VC deals that were recently announced – Beyond the Rack, Fixmo and Shopify. Hist post included interesting commentary about the size of the deals, which are all more than $15-million.

“Obviously, I get nervous when I see a company (portfolio or not) raise such a large chunk of cash. Why? It’s not because I like the small size of the average Canadian financing rounds. Rather, it’s because I think that too much money for a young business can be as bad as or worse than not having enough. $15M-$40M rounds for Canadian tech companies are amongst the largest we have seen this side of the border in over 10 years.”

Whenever I hear about companies raising large amounts of money, one of the first things that comes to mind is how do they spend so much money. I can get raising and then spending $1-million, $2-million or even $5-million but when you’re talking about $15-million or $23-million (raised by Fixmo), that is much more difficult to grasp.

Think about it this way. If you raise $15-million, for example, it’s enough to employ 40 people for four years based on a back of the napkin calculation of $100,000 per employee. Another way to look at it is if you move into a large office to accommodate more people, rent could easily cost $20,000/month, $250,000/year or $1-million over four years.

Let’s say, a company decides to make a few strategic acquisitions for technology and/or people. That could be $1-million or so.

When you start breaking things down this way, raising a large round starts to make more sense, although it would still be mind-boggling to have that much money in the bank.

The challenge for start-ups that raise a large round is obviously having a plan on how to spend it. As well, a company needs to have the right people to effectively and efficiently manage the money so it’s spent on the right things at the right time.

From personal experience, I know having money in the bank is as dangerous to a startup as having no money. One of the biggest issues is thinking the money is going to last forever. Suddenly, you go from being frugal and scrapping to sloppy and frivolous. As well, there is a risk of moving too aggressively too soon, which could see the burn rate soar before it should.

Don’t get me wrong, the ability for Canadian startups to do great deals is awesome but having that much money can be as challenging as having no money.

What do you think? What are the downsides to raising a large VC round? How do start-ups make sure they taken the best approach to spending/investing a major raise.

Too Many “Little Startups” Getting Funded?

By Mark Evans in Startups 1 Comment Tags: , ,

“Little startups are ridiculously overfunded. The market is ridiculously overcrowded with early stage investors. This results in a talent drain, where the best talent gets diffused and work for their own startups.”
- Sean Parker speaking at the Techonomy conference (quoted by TechCrunch)

The question whether Parker is Chicken Little afraid the sky is falling, or whether he’s thrust an issue into the spotlight that no one wants to talk about because the financing marketplace for start-ups is so robust and exciting these days.

Parker’s comments play into the growing discussion about whether there’s a start-up bubble happening, which is likely more pronounced in Silicon Valley. As much everyone is stoked that start-ups being financed, IPOs are happening and investors are getting returns, there is talk about whether the market is over-heated.

The question that has to be asked is whether a hot market is a bad thing. Can there be a downside to startups and entrepreneurs attracting growth capital, other than disappointed investors down the road?

In Canada, the growing amount of start-up financing can only be seen as a positive development for lots of reasons. Even if some or many of these start-ups fail, the experience gained by entrepreneurs and start-ups will be a major boost to help the Canadian start-up landscape evolve and grow.

Without capital to nurture an idea or a business, there is no way entrepreneurs can gain experience to be successful. At the same time, the only way VCs can make returns is by actively investing, even though many of their picks won’t pan out.

Can the market get overly frothy and over-heated? Absolutely. Should investors do their homework so reduce the risk of making a mistake? Definitely. Are these “little start-ups” over-funded? That’s difficult to say because it’s a sweeping statement that covers everyone start-up with the same brush.

My take is the more start-ups that get funded, the better – even if they are little ones. The onus is on investors to make smart decisions rather than jumping on the bandwagon. By investing in lots of little start-ups, the better the prospects of having one of them turn into a major success.

(For startups looking for marketing, content and communications service, my company, ME Consulting, offers cost-effective strategic and tactical services.)

No VC Cash for You, Startup Founders

By Mark Evans in Social Media, Startups 3 Comments Tags: , ,

For startup entrepreneurs, one of the ultimate goals is getting acquired for a boat load of cash. The bigger the purchase, the bigger the success, irregardless of how large the business or how many customers it might have.

Part of the getting bought is finally reaping the rewards for hard work, the long hours and the modest salaries. It’s the way of the world; you work hard, you’re successful, you get to be rich.

But….things seem to changing or, at least, the rules of engagement are changing.

A growing number of entrepreneurs – DropBox, GroupOn, Airbnb – are being allowed to sell their pre-sale/pre-IPO shares as part of a private financing. And we’re talking mega-bucks as opposed to pay the mortgage money.

This is a bad development because it handsomely rewards entrepreneurs for getting the job mostly done but not all the way done. It is great for the entrepreneur but probably not as good for the startup because you have to believe the motivation and fear that drives entrepreneurs could easily disappear once they have lots of cash.

The other danger is if entrepreneurs are rewarded while employees don’t get to share the wealth Case in point is the fiasco that surrounded Airbnb’s $21-million reward to the company’s founders, which ignored employees until the proverbial shit hit the fan.

As well, you have to wonder about the approach being taken by investors. By letting founders cash out in a major way, how does it impact the way these founders are going treat the new investment? After all, the founders have their cash so if the business doesn’t go as well, it’s not going to matter as much, if at all.

Don’t get me wrong, there are situations in which letting founders cash out some of their equity during a financing makes sense. If a founder, for example, had a $500,000 mortgage hanging over his head and a partner bugging them about their financial security, it might make sense to give the founder one less thing to worry about so he/she can focus on growing the business.

That said, we’re talking about relatively small amounts of money as opposed to millions of dollars that would ensure they would never have to work another day, which is tempting if you do have a startup to operate.

It is difficult to tell why VCs have embraced the idea of giving founders significant amounts of money before an exit but it is a troubling trend.

Links:

SFGate: Early payouts to startup execs a troubling trend

For Start-Ups, It’s All About Traction

By Mark Evans in Startups 7 Comments Tags: , , ,

I’ve been thinking about Dan Martell’s recently post, “To Raise or Not to Raise”, which encourages entrepreneurs to “go out there and make some money” rather than being too focused on raising seed capital.

It’s solid advice, particularly in Canada given ideas rarely (ever?) get funded. In many respects, the pursuit of venture capital, while sexy and challenging, is distracting and a productivity killer. Getting funded to develop an idea is a nice luxury but it’s also akin to putting the cart before the horse.

In talking with an entrepreneur who has built a large community, the big advice he offered to start-ups is the importance of getting “traction”. This is different from making revenue because it’s about attracting and delighting users with your service. Once there is a critical mass of users, it can open up a variety of doors to generate revenue.

A question is how do you attract users without money for marketing or customer acquisition. Obviously, making people pay for a service is a no-brainer but it’s also about being creative and flexible enough to find ways to get lots of users while, at the same time, managing to pay the bills and put food on the table.

It’s a concept called “Hamburger Profitability” in which an entrepreneur survives financially by supporting the start-up through things such as consulting or a part-time job. It is a tough way to make a living and establish a business but if you’re successful it also offers tremendous experience and the traction to seek financing without being desperate or without clout.

It would remiss to over-estimate the challenges in getting traction because it’s not a simple proposition. It’s a combination of having a service that is accessible, user-friendly and delightful, smart and creative marketing and some luck.

In the scheme of things, traction is a huge hurdle for entrepreneurs. It’s one thing to start a business or have a good idea, it’s another to convince lots of other people to embrace it. But if an entrepreneur can overcome this hurdle, it can set the stage for success and maybe even venture capital.

Related Posts Plugin for WordPress, Blogger...