Venture funds, business angels or self-sufficiency?
Greg Linden was one of the main developers behind the “system-advisor” at Amazon, which recommends books, movies and other products to its users, based on the history of their purchases. Subsequently, he received an MBA degree at Stanford and in 2004 launched a startup called Findory, which offered personalized online newspapers. It’s hard to imagine someone more suitable to make this project successful, but Feyndori ceased to exist in November 2007. In a brilliant "funeral talk" Linden pointed out that his big mistake was financing the project on his own, while in parallel, he tried to raise funds from companies engaged in venture financing; he simply could not convince them of the advisability of investments. Instead, he should have asked for funds from business angels (a business angel is an investor, ready to invest at the initial stage of a project that was not promoted).
upd This post is now in the Venture Magazine blog.
Where to get start-up capital is an important decision for everyone who starts a project from scratch. In the early stages of a company's existence, there are three possible sources of capital:
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1. Venture funds;
2. Business angel. Usually these are wealthy individuals, but sometimes they are firms, such as Y Combinator ;
3. Friends and relatives. You yourself, if you can afford it.
In order to decide which of the options will be better for your startup, you need to understand how investors value companies. Of course, there are a number of criteria, but the main three are as follows: team, technology and market. Business angels and VC evaluate them differently.
Market. VCs want to invest in companies that give a significant return in terms of capital intensity (or the amount of their capital), which is usually estimated at hundreds of millions of dollars. To interest VC companies need to catch a fairly favorable market situation. If you can not provide sufficient evidence that your idea will bring the company a return of at least $ 100 million in the horizon for 4-5 years, then VC will not suit you. It is often enough to use consumers as the main point, replacing a favorable market situation; Most VCs will take a vast and rapidly growing user base as sufficient evidence that market conditions and opportunities are favorable to your project.
Team. VCs use simple binary classification. The founding team is relied upon to deserve support (either by itself it is considered as “with strong rears”) if it contains one or more involved key figures from successful or fashionable companies (such as Google) or entrepreneurs whose assets already exist, at least one “shot” project. Otherwise, the team is considered as a “team with weak rear”.
Technology. VC is not always well versed in the assessment of technology. For them, technology is either a risk (the team claims that their technology can do X; is it so?) Or it is an entrance barrier (is the technology sufficiently complex to prevent the mass entry of competitors into the market). If your project uses non-trivial technology, it will be very useful to have in your team a person who is a recognized expert in this field, either as a founder or as a guest expert.
Here is the rule that must be fulfilled in order for the VC to vote for you: you must pass a test for favorable market opportunities and at least one of the two other tests: either you have a team with good rears, or you have a non-trivial technology that will stop its competitors from entering this market segment.
There are many types of business angels, but I recommend choosing only one type: someone who was himself a successful entrepreneur and deeply interested in the target market segment or technology that you are promoting. Here is how angels evaluate the three main investment criteria:
Market: you pass the test even if the market segment is just beginning to be developed, but both the angel and the team must believe that in a few months the company will reach a point when it can convincingly show that the market situation is favorable and provides many opportunities (and way attracts VC) or develop a technology valuable enough to be acquired by a large company.
Team: the team must be a man whom the angel knows and respects from the past life.
Technology: The technology should relate to the area in which the angel has experience and is well understood by him.
Here's how the angel will vote: You must complete any two of the three tests (team / technology, technology / market, or team / market). I financed all three of these combinations, and in the future this led either to subsequent financing from the VC side (for example, Aster Data , ...), or to a quick takeover ( Transformic , Kaltix - both were absorbed by Google).
This is the only opportunity if you do not pass on the criteria required by the VC or business angels. However, beware of staying self-financing for too long. An external investor provides valuable authoritative opinions, and prevents a situation where your company becomes an empty room where only your own ideas echo. Angel or VC can look at things in the long run. Sometimes an investor can impose something that then becomes a boon to the founder’s career: to close the company and do something else. This is a very difficult decision that is difficult to make without an outside investor. My advice is to provide the project yourself only until you decide who you can attract - VC or a business angel.
But back to Greg Lindén and his Project Finder. According to my calculations, Finderi passes through tests for the team and technology from an angel's point of view - if there is an angel who is interested in personalization technology. But the project does not pass any test for VC. Given this, Greg definitely should have sought the funding of angels. It seems to me that this road would most likely lead to the subsequent sale of the company to one of many potential buyers: Google, Yahoo, or Macrosoft, among many others. Of course, it is easy to argue in hindsight. I deeply respect Greg's mind, as well as dedication, and wish him more successful initiatives in the future.
Anand Rajaraman is the co-founder of kosmix.com and the founding partner of Canbrian Ventures. As well as an investor in GigaOM.
Translated article to Translated.by.
Translation: © Renata33 , the_corrector .
upd This post is now in the Venture Magazine blog.
Where to get start-up capital is an important decision for everyone who starts a project from scratch. In the early stages of a company's existence, there are three possible sources of capital:
')
1. Venture funds;
2. Business angel. Usually these are wealthy individuals, but sometimes they are firms, such as Y Combinator ;
3. Friends and relatives. You yourself, if you can afford it.
In order to decide which of the options will be better for your startup, you need to understand how investors value companies. Of course, there are a number of criteria, but the main three are as follows: team, technology and market. Business angels and VC evaluate them differently.
How VCs evaluate projects from scratch
Market. VCs want to invest in companies that give a significant return in terms of capital intensity (or the amount of their capital), which is usually estimated at hundreds of millions of dollars. To interest VC companies need to catch a fairly favorable market situation. If you can not provide sufficient evidence that your idea will bring the company a return of at least $ 100 million in the horizon for 4-5 years, then VC will not suit you. It is often enough to use consumers as the main point, replacing a favorable market situation; Most VCs will take a vast and rapidly growing user base as sufficient evidence that market conditions and opportunities are favorable to your project.
Team. VCs use simple binary classification. The founding team is relied upon to deserve support (either by itself it is considered as “with strong rears”) if it contains one or more involved key figures from successful or fashionable companies (such as Google) or entrepreneurs whose assets already exist, at least one “shot” project. Otherwise, the team is considered as a “team with weak rear”.
Technology. VC is not always well versed in the assessment of technology. For them, technology is either a risk (the team claims that their technology can do X; is it so?) Or it is an entrance barrier (is the technology sufficiently complex to prevent the mass entry of competitors into the market). If your project uses non-trivial technology, it will be very useful to have in your team a person who is a recognized expert in this field, either as a founder or as a guest expert.
Here is the rule that must be fulfilled in order for the VC to vote for you: you must pass a test for favorable market opportunities and at least one of the two other tests: either you have a team with good rears, or you have a non-trivial technology that will stop its competitors from entering this market segment.
How business angels evaluate projects from scratch
There are many types of business angels, but I recommend choosing only one type: someone who was himself a successful entrepreneur and deeply interested in the target market segment or technology that you are promoting. Here is how angels evaluate the three main investment criteria:
Market: you pass the test even if the market segment is just beginning to be developed, but both the angel and the team must believe that in a few months the company will reach a point when it can convincingly show that the market situation is favorable and provides many opportunities (and way attracts VC) or develop a technology valuable enough to be acquired by a large company.
Team: the team must be a man whom the angel knows and respects from the past life.
Technology: The technology should relate to the area in which the angel has experience and is well understood by him.
Here's how the angel will vote: You must complete any two of the three tests (team / technology, technology / market, or team / market). I financed all three of these combinations, and in the future this led either to subsequent financing from the VC side (for example, Aster Data , ...), or to a quick takeover ( Transformic , Kaltix - both were absorbed by Google).
Friends, Family or Self Financing
This is the only opportunity if you do not pass on the criteria required by the VC or business angels. However, beware of staying self-financing for too long. An external investor provides valuable authoritative opinions, and prevents a situation where your company becomes an empty room where only your own ideas echo. Angel or VC can look at things in the long run. Sometimes an investor can impose something that then becomes a boon to the founder’s career: to close the company and do something else. This is a very difficult decision that is difficult to make without an outside investor. My advice is to provide the project yourself only until you decide who you can attract - VC or a business angel.
But back to Greg Lindén and his Project Finder. According to my calculations, Finderi passes through tests for the team and technology from an angel's point of view - if there is an angel who is interested in personalization technology. But the project does not pass any test for VC. Given this, Greg definitely should have sought the funding of angels. It seems to me that this road would most likely lead to the subsequent sale of the company to one of many potential buyers: Google, Yahoo, or Macrosoft, among many others. Of course, it is easy to argue in hindsight. I deeply respect Greg's mind, as well as dedication, and wish him more successful initiatives in the future.
Anand Rajaraman is the co-founder of kosmix.com and the founding partner of Canbrian Ventures. As well as an investor in GigaOM.
Translated article to Translated.by.
Translation: © Renata33 , the_corrector .
Source: https://habr.com/ru/post/38135/
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