Virtual World Witnesses Highest Virtual Goods Sale Of $635,000!!!

The virtual world's goods and virtual transactions continue to challenge the physical world in terms of transaction volume and valuations. Recently, someone sold a virtual property in the Entropia virtual world for $635,000 dollars.  Yes, that is correct $635,000 USD for a virtual item. The owner sold the property in one of Entropia's worlds called  Planet Calypso.

The interesting aspect of this historic sale is that I was notified by a worldwide real estate developer and builder about the transaction. Clearly, important people in the physical business world are taking notice of the meteoric rise of  virtual goods and currency and wanting to find out how they too can take part in this opportunity. I certainly have a large and active contingent of virtual world/currency business owners and entrepreneurs contacting me about trade in virtual items. However, this is the first time a successful conventional physical world business leader has seriously stated an interest in figuring out how to make the cross over from a physical business model to a virtual model.

The Entropia world has been with us for some time and has been a pioneer in virtual goods sales and virtual currency/physical world currency exchanges. They have been a real sleeper from the press perspective since Facebook decided to get into the virtual currency business.  We tend to forget about World Of Warcraft. Entropia, WeeWorld,  and  IMVU  to name a few virtual worlds that have been around for some time and actually have significant valuation form an investment perspective.  They have great revenue streams, dedicated players, a built in social network and a constantly changing environment that keeps people engaged over time.

Are these worlds the next big investment targets? Well of course, I have already been contacted by a VC about how best to take advantage of these virtual world properties.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

2010 Answers To The 20 Questions Every Startup Should Answer

The results are in for the 2010 startup company survey recently sponsored by Kevin' Corner. The survey included 20 questions designed to uncover how startups are approaching their businesses, funding and operations. The response to the survey was great with more people participating then I had originally expected. The results are intriguing and in some cases unexpected. The participants were selected from the Kevin's Corner contact list. Over the past two years the Kevin's Corner blog has attracted thousands of visitors from 75 countries. Many of these visitors are entrepreneurs, business owners and investors.

The objective of the survey was to provoke thought amongst the startup community about how best to approach a startup and to solicit real opinions on how startup participants manage the startup process. The long term goal of the survey process is to see how startup trends are changing based on market and economic conditions.

The following are the results of the survey. I have added my own interpretation of each question to provide a context and hints as to the purpose of the question.

I would like to thank everyone that participated and took the time out of their busy schedule to answer the questions. I was extremely impressed by the honesty exhibited by individuals that provided comments and reasons behind their selections.

1.) Should you craft an exit strategy in the early stages of a company.

71.4 % Yes
14.3 % No
14.3 % Other

I was not surprised by the heavy skew towards the support of an exit strategy early in a startup's life-cycle. Many startups have a preconception of how and when they exit. They also have notions of how much they are going to profit from an exit. The problem with this is that savvy investors that I have spoken to can be turned off by this focus. What they really want to hear is how the founders are focused on creating a solid successful company. In reality making a company a success is hard work that could take a long time. If an entrepreneur goes into a venture with unrealistic expectations those expectations could have a impact on the startups ability to execute. With that said startups are build on dreams and many dreams are fueled by the big payout.

2.) Are conflicts and disagreements amongst co-founders good or bad for a startup.
50% Good
21.4% Bad
28.6% Other

I asked this question because conflicts inevitably occur in a startup and founders need to be prepared for them. Some discord is a good think because it stimulates creative thinking and challenges the team. To much of it and it will start to have a negative impact on the team. The comments from the survey support this position.

3.) All Internet related startups can be started and launched with little or no investment capital.
21.4% Yes
78.6% No

Most of the participants answered this question with a resounding no. I was surprised to see this because many people believe that you can bootstrap your way to Internet nirvana. The survey participants are obviously seasoned entrepreneurs and realize that this is more myth then reality.

4.) Startups should have a time line for milestone achievement.
85.7% Yes
0% No
14.3 Other

The majority of survey responders agree that setting milestones and seeking to meet or exceed them is a good idea. This is good advice for people just starting out with a new company. Unfortunately, many entrepreneurs do not break down their startups into measurable achievable goals so they never really know where they stand.

5.) Establishing business metrics in the early stages of a company is an effective management tool to measure progress against goals.
78.6% Yes
21.4% No

This is a follow up to question 4. Setting goals is great but being able to measure progress is better.

6.) A startup should always be engaged in fund raising even if the startup has proper funding.
71.4% Yes
07.1% No
21.4% Other

In general most entrepreneurs understand that continually being in the hunt for investment capital is necessary part of an entrepreneur's life. The comments did bring out that not everyone is good at this and it does eat up a lot of time and effort. These last points are well taken and does imply that someone in the startup needs to be a good fund raiser. In many cases this is all that member will be doing allowing the other members to get the real work done.

7.) Equity only compensation is an effective way to attract staff to a startup company.
26.6% Yes
50% No
21.4% Other

I was surprised by the results for this question. The answer does indicate that founders are now realizing that real cash is required to get a company up and going. One interesting comment was that equity is actually a very expensive way to compensate participants. I found this to be a very good comment because there is so a finite amount of equity in a company. Also the legal fees to continually allocate equity for compensation can add up to a significant portion of a startup budget.

8.) Are venture capitalists a good source of advice in the early stages of company formation even if you are not seeking their investment.
57% Yes
14.3% No
28.6% Other

The majority agrees that there is value to a VC's advice and comments even if theire is no investment capital coming from the VC. The comments themselves reveal that the individual VC's you talk to make a big difference in whether there is or is not value to the advice.

9.)What should your reaction be to an investor when they decide not to invest in your startup.
0.0% My idea and company are not worthy of investment
14.3% The investor does not know anything about my business
07.1% The company should change its strategy
28.6% The investor is not knowledgeable about my business sector
00.0% We are asking for too much money
64.3% Other

Clearly the answers to this question were not adequate to answer the question properly. The majority of the respondents answered this question with comments. The responders do not come away from an investors lack of interest with one take away. There are many things that can be derived from an investors lack of interest. One theme consistent amongst the respondents was that this reaction is not cause for panic. Investors are not all knowing and do have their own prejudices.

10.) What should you do if your working capital runs out.
0.0% Close the company
0.0% Mothball the company
14.3% Scale the company down
21.4% Change the product or service
57.1% Seek new investment sources
14.3% Put all of your own money into the company
28.6% Other

The majority of the responders indicated you should carry on and seek new capital sources. The comments themselves were heavily skewed in this direction.

11.)All startups should prepare a business plan even if they are self funded.
85% Yes
7.1% No
7.1 % Other

It was great to see that most startups do create some form of a business plan to sort out revenue, expenses and staffing.

12.) A commitment to a startup lifestyle will have no impact on an entrepreneur's family or close friends.
07.1% Yes
92.9% No

I have to admit that this was a leading question on my part. You never fully realize the impact of a startup on your family or friends until you are involved in the venture. A commitment to a startup has a significant impact on your personal life that can not fully be understood unless you have started your own company.

13.) If the majority of the people you survey think your business idea is a good one you should start a company based on that idea.
21.4% Yes
07.1% No
28.6% Ask them why they think it is a good idea
64.3% Ask them if they would invest in the idea
35.7% Other

The really important question is would a person invest in the idea.

14.) Startups should assume that outside(non-founder or friends) investors will invest in their company.
42.9% Yes
42.9% No
14.3% Other

I do not know what to take away from this dead heat. It certainly indicates that the entrepreneurial community is split on the role and commitment of outside investors.

15.) Institutional(Venture Capital/Bank Loan) investment is required for a company to reach its full potential?
21.4% Yes
50%% No
28.6% Other

The preferred answer to this question appears to be somewhat inconsistent with the answers to questions 3 and 7. Apparently, the crowd believes you need external working capital to run a startup. However, it they are not keen on institutional funding.

16.) Founders should invest all of their savings into their startups before seeking external funding.
0.0% Yes
78.6% No
21.4% Other

Clearly the participants do not suggest investing all of a founders cash into a business. This answer plus the answers to several other questions indicates that the preferred form of startup funding is angel or individual investor funding.

17.) Startup teams should be multidisciplinary including business, finance, legal, domain and technical expertise.
92.9% Yes
08.1% Other

Everyone agreed that in a perfect world you need a diversity of skill sets in a startup to make it work. This dispels the myth that a couple of geeks in garage can start and launch a successful company.

18.) Startup founders should have a preset time line for when a business will be successful.
50.0% Yes
21.4% No
28.6% Other

The participants generally agreed that a time-line of some kind should be established as a benchmark and guideline. Some of the comments indicates that things naturally happen that upset the plan. However this does not mean you should not have a time line.

19.) Startup entrepreneurs should get approval form their family members before starting a company.
14.3% Yes
42.9% No
7.1% All close family
14.3% Direct family members
14.3% Husband or Wife
28.6% Other

This one was very interesting based on the fact that the answer to question 12 indicated that the majority agreed that a startup lifestyle has a big impact on family and friends. Despite this close to half of the responders indicated they would go for it without family approval.

20.) Should a company's original business plan or idea be modified before the company receives market feedback.
35.7% Yes
35.7% No
00.0% If A Company Can Not Receive Investment Capital
14.3% If Too Hard To Bring To Develop And Bring To Market
21.4% Other

Most the comments in the Other category support the notion of changing direction based in different sources of information. This pushes the general consensus into the yes category.

In conclusion, this survey pointed out some very interesting startup characteristics, attitudes, operational approaches and funding preferences. All good portion of the entrepreneurial community that responded to this survey where seasoned entrepreneurs that appear to have at least one start-up under their belt.

It also indicates that entrepreneurs are beginning to change their notions about how much investment, the form of investment and the time-line for success are changing. It will be interesting to see if next years survey will differ from the current results.

Once again I do appreciate the contribution of the participants and the valuable information they have provided.. Having real life feedback to tough startup questions will help newly minted entrepreneurs, people considering a startup and existing professionals.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about startup companies. Kevin is a long time entrepreneur having started, sold, IPOed and operated a number of startups in the US and Europe. Kevin currently advices startup companies on technical, funding and business operations. Kevin is a frequent speaker at conferences in Asia, Europe and the US.

Managing Startup Expectations

I thought long and hard about the wisdom of addressing the subject of startup expectations. The startup expectations of business owners, investors and employees are a complex mix of emotions, dreams, culture, naivete, ambition, peer pressure, ego, risk assessment and national pride. These factors make the subject delicate and inherently risky for anyone brave enough to address them. You can easily be accused of being on a religious/political/cultural quest or a CFO's rant on expense management when you talk about a ventures expectations. Despite this minefield startup expectations are such a fundamental part of early stage companies that the subject warrants the risk.

My experience starting companies, closing companies, taking companies public, selling them, managing them and funding them has made me realize that the way a team manages expectations can be one of the most influential factors in the success and longevity of a startup. It is also one of the most difficult subjects to deal with because expectations are so crucial to making the leap into a startup. Expectations are associated with many startup problems that lead to issues ranging from team member conflict, investor dissatisfaction, insufficient funding, unrealistic time lines and inappropriate staffing. Well managed startup expectations are also at the root of companies that become very successful companies.

Startup culture has historical roots going back well before the current age of technology. In the US the mass emigration into the country was spawned by individuals wanting to start something new. In many cases people came to the US with virtually nothing except an idea and hope that things would turn out well. Back in the 1800's Horatio Alger wrote books on how social mobility in the US allowed anyone to work hard and make it big. His series of publications mixed with the American dream eventually grew into a national business culture fueling the notion that if you have a good idea and work hard you will be successful. This culture has spread throughout the world becoming the fuel for entrepreneurial ventures.

People are inspired by the success of Facebook, Google, Apple, Oracle, SalesForce.com and Microsoft and strive to do the same. It happened to the founders of those companies why not me?

Yes, that is true. However, many entrepreneurs jump in without fully understanding the intricate mix of factors that led to the success of the big named companies. Take Apple for instance. This company nearly collapsed with Steve Jobs being thrown out on his butt only to rise from the ashes of Apple and a number of failed startups(remember NEXT) to make Apple what it is today.

In point of fact many startups will go through several phases and may never become an Apple, Microsoft, Facebook, Twitter, etc. or it will appear that the startup is doomed when in fact a bit of good fortune and quick thinking will prevail and the company will survive. In some cases the company will prevail yet never reach the level of the original expectation or goal.

This is where the real challenge lies for entrepreneurs. How do you manage expectations given the realities of a startup company? How do you manage investors, employees, advisers and management team expectations. How do you keep the company on a trajectory to meet the original goals when the going gets a lot rougher then you ever anticipated?

This subject is too interesting and complex to be fully addressed in a single blog. The subject deserves a more detailed history lesson, examples, interviews, war stories and tactics used in specific scenarios. However, there are some short thought provoking tips that are worth mentioning that can help to successfully manage expectations.

Bury The Discussion Of The Big Pay Out - You may have sat around a table and speculated about the big pay out. However, when you start the company get rid of that notion. You need to hunker down and figure out how you are going to start and run a real company. The prospect of the big payout may be the initial reason you got into the venture. However, it can wind-up being toxic when reality hits. Forget about the dream until its proven that you are on the dream track.

Team Composition - Startups are not for everyone. That includes investors, contractors and employees. Spent some quality time assessing potential team members. Have they ever lived through a startup before? If not, what is their risk reward expectation levels? How often have they been thumped by a life experience and gotten right back up? What is the energy level in the team. Do you really have the right skill set mix or are you a bunch of friends that want to start a company.

Execution is 9/10's Of the Law - Expectations are great. However, they need to be backed up by execution. Everyone in the company should get a startup orientation. The dream may be far off so let's focus on the here and now getting the critical tasks done step by step. Focus, focus, focus.

Is The Idea Any Good? - If a company has already been successful with an idea it is unlikely that another company will be. Pick an idea that is new yet not so far out that people will not get it or it is too hard to implement. Derivative of successful ideas are good if you can move fast enough to beat everyone else thinking the same thing. Does the world really need another social network? The idea phase is actually very important and is filled with insidious expectations that need to be dealt with before turning the idea into something practical.

Success Takes Time - It will always take longer then you expect. In many cases much longer. Deal with this upfront.

Investors - Be careful with naive and ill informed investors. You do not want to have them knocking on your door six months after they invest asking for 100x of their investment. All startup's desperately need investment capital. Many of them take money from investors that have unrealistic expectations. Make sure they understand that time may actually work in their favor or be prepared to spend a significant amount of time managing investors and not your business.

Dream Parties, Fun And Milestones - Recognize the smaller milestones even if they are not the home runs. This will emphasis the importance of baby steps and deemphasize the big dreamy stuff. Above all try to have a congenial environment without masking the bad news. This is really hard to pull off and requires real leadership skills on the part of the management team.

When Things Are Not Going Well - Let investors and employees know about it. This is part of being in a startup. If they can not handle it perhaps they should go to work for a big bank or insurance company.

Expectations are complicated yet essential to get a company off the ground and to drive employees and investors to shot for the moon. Expectations can be managed in a way that keeps your team grounded and at the same time motivated to accomplish things they would never have accomplished without them. Be careful with expectation setting because people will buy into them and expect you to deliver on the promise.

2010 Entrepreneurship And the Realities Of Self-Funding

Entrepreneurs enter the business world with many preconceptions. My previous blog on the "Value Of An Idea" and the subsequent feedback reinforced the fact that entrepreneurs hold a diverse set of opinions about the true nature of the business environment as it relates to ideas, valuation and funding. One of the most debated topics for new ventures in the current economic climate is sources of funding for early stage companies. The climate has made it exceedingly difficult to find investment capital forcing entrepreneurs to be creative in the financing of their businesses.

The necessity to self-fund a business has become almost mandatory for startup ventures. The current economic climate exacerbates the financing challenge. However, even in relatively good economic conditions an entrepreneur will most likely have to self fund the early stage of business formation.

I have started or participated in the formation of many businesses and there has never been a time when the early stage of the business did not require some level of self funding. This is an important point because many startups believe that the current economic environment is unique in its stingy attitude towards funding early stage companies. In my experience this is not necessarily the case. It is a matter of how you define "early stage". The current economic climate is stretching the definition of what early stage means resulting in financiers expecting far more product and business development before they express interest in putting money into a business.

So how should an entrepreneur approach the early funding of a company? How does the current economy make this period of business development different than in years past?

1.) There Are No White Knights - Do not approach a business assuming that a white knight or bank is going to invest until substantial progress has been made with the business. The current economy has made this more apparent.

2.) Friends And Family - If the current economy has significantly changed one aspect of fund raising it has been friends and family as a source of early stage working capital. The economy has hit individuals more so then many institutional investors resulting in this sector of funding being an unlikely place to find funding.

3.) How Much Money Do You Need? - Do not underestimate the investment required to start a business. Make a calculated assessment on how much money you are going to need/invest. A common mistake is making an investment too small to make enough progress before external funding or profitability. Current economic conditions require a business to show much more progress than in the past before financing can be secured.

4.) Business Planning - Create a business plan even if you are self funded. The plan will help guide the business and act as a benchmark to determine if the business is viable at certain points in the business life cycle. Certainly reality very rarely tracks a plan. However, the plan is a good guide for how far you veer from your original plan and what additional funding will be required to reach you business goals.

5.) Know Your Limits - Many enthusiastic entrepreneurs will continue to invest their own funds beyond the initial planned investment. This is dangerous and potentially damaging to your family and your personal finances. Make a decision on how much you are going to invest and hold to that decision. Any investment beyond the initial plan should be thoroughly evaluated. If an additional investment is made there should be clear goals and objective associated with that investment.

6.) Early Investor Commitment - Although an institutional investor will very rarely invest in the early stage of a company they should be consulted prior to the start of a business to determine investor interest. There is no reason to invest your own personal funds in a business if there is no institutional interest in your idea or business. An important business milestone is an investor's expressed interest in investing in a business based on a set criteria. Investors are great sources of information about the business categories that investors are interested in. Your idea and company may or may not fit into one of these categories. If it does not you should reconsider and attempt to reposition the business in such a way that it fits the investor profile.

7.) Spread Financial Risk - Form a team of individuals to start a business. Do not go it alone. This approach has many benefits but for the purpose of this subject it spreads financial risk. The disbursement of risk reduces the pressure on you to carry the company on the back of just your wallet and makes for a much easier sell to your family and supporters.

8.) Get Family Buy In - Any investment of personal funds should be vetted with family members. Your decision will have a big impact on your family requiring buy in before moving forward.

9.) Live To Fight Another Day - New business ventures are tough sledding and the majority of them do not reach their intended goal. Set specific milestones that allow you to determine if the business is on the road to success. If it is not have the courage to move on. If the business does not work out you will certainly learn useful lessons that will come in handy when starting and managing future ventures. Very rarely does an entrepreneur come out of a business venture without some positive life and business experiences.

The current economic climate makes it difficult to obtain early stage funding. Some self funding is going to be required to get a business to a stage where an external investor will participate.

The funding environment for 2010 will improve but will continue to be challenging. There are key business areas that will attract "early" stage funding. Make sure you know what those are and position yourself to take advantage of the opportunity.

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Re-Startup Formula For Success

A re-startup is a company that evolves from an unsuccessful startup. Many startup companies never achieve their initial objective to grow and become successful. The conventional wisdom is that these companies are failures. This assumption is not entirely true. Many startups fail and have the potential to succeed in a new form. In many ways a "re-startup" can have advantages over pure startups making them more likely to succeed then the original startup.

There is plenty of documentation and literature on how to start, fund and manage a startup. However, there is very little advice on how best to manage a re-startup. There are similar challenges to running a startup and a re-startup. However, there are distinct challenges associated with a re-startup that require special management techniques to position them properly and put them on the road to success.

Re-Startup Building Blocks Self Assessment

There is a yin and yang to a re-startup. Certain aspects of a startup's history can work for or against a re-startup. Re-startups are best characterized as a natural evolution of a startup sharing common components that need to change over time. An assessment of these components should be conducted during the formation of the re-startup and a determination of how and if these components should be changed to properly position the new entity for a restart.

Staffing - If the staff has not been mistreated they most likely will continue to be associated with the company and the management team. This is a great asset especially if the company is highly dependent on scares human resources. In particular, technology based companies spend a lot of time and money acquiring technical resources. If a re-startup can retain these resources it helps to control cost and allows the re-startup to get to market quicker.

On the negative side the staff may be disgruntled and morale low. This is something that is difficult to change and may require a churn of most of the human resources in the company and rehiring to build the new company.

The staff should be fully evaluated to determine who is going to stay and who is going to go. Special attention should be given to key players that will form the nucleus of the new entity. These are people with special knowledge or skills that will be needed to get the re-startup off the ground. These are usually people that lead by example. The difficult part of the restaffing effort is removing people that have the talent and skills you need but do not have an enthusiastic attitude about the team or the new company. These people will have to be let go even if they represent a critical component to the business. The new business can not tolerate a naysayer spreading ill will in the company.

Morale - This is a big one impacting everyone in the company. If a startup has failed it leaves a residue of bad feelings, self assessment and doubt about the management team and their ability to lead the company to success. However, if the startup had recognized some success the management team and the employees may have confidence that the team can be successful with a new business plan.

The real challenge is to get the energy level back into the company. This may require the removal of some or all of the management team and an infusion of new blood and new ideas into the company. Bringing new personnel and ideas into a company can be reinvigorating especially if the old startup was not cutting it. The key is to establish a core group of people that believe in the new entity and the new personnel.

Learning From Mistakes - The initial startup failed for some reason. It could have been the business plan, the technology platform, a change in the market, the loss of funding. etc. The key is for the new decision makers is to acknowledge the deficiencies in the old model and learn from them. This alone will have a great impact on the morale of the company. This process should also make for a new and stronger company more likely to succeed.

Funding Sources - The original entrepreneurs spent time and energy making contacts in the financial world to raise working capital or to establish business relationships. These contacts will come in handy when the time comes to raise funds for the re-startup. The downside is that bridges most likely have been burned and the original funding sources are no longer an option. Also, a failed startup usually does not bode well for the managers involved in the original fund raising effort.

This is a difficult circumstance to navigate. However, savvy investors may look at a team that has failed with a startup as a learning experience for the team. Ironically, people learn more from failures then successes and really wise investor will know this. If the management team can convince an investor that they truly have learned from the prior startup and have a convincing argument for the re-startup they may very well get funded by the original investors. New investors will also be interested if the entity has an established platform, customer base and or product. Emphasis the positive aspects of the original startup's achievements and how the new team has learned from the past and is repositioning the company for success.

The Bottom-line - Many newly minted entrepreneurs and startup companies have a hard time managing to the bottom-line. They are usually run on enthusiasm and the perceived need for rapid development and time to market. This can be a formula for poor financial management that leads to overspending or a lack of appreciation for cash flow management. In many cases the original startup failed because of this problem and not because the business was not viable.

If this is the case the re-startup needs to put controls in place that obviate this problem and demonstrate to potential investors and customers that the business can be viable if the bottomline is managed properly.

Time Is Your Friend - Just because a business failed does not mean the same business will not succeed at a different time. Many new companies are ahead of the adoption curve yet spend as if they are at the cusp. A good management team will do a self evaluation of the failure. They might find that the time is now right for the model and should proceed with that hypothesis. The original team and model may require little change to relaunch the business and become successful.

Your Customers Are Your Allies - Even if a business has failed there will be customers out there that believed in the company, product or service. These same customers could become customers of the new business. Use these contacts to get endorsements for investors, to seed the new business and to potential be sources of capital as first customers or actual investors.

In conclusion, re-startups are common and in many cases will be successful because of lessons learned from the original startup. They present unique challenges that do need to be addressed. The best way to make them successful is to conduct an honest business and self evaluation to determine what worked and what did not. Launch with a new and improved leveraging the past. you might be surprised at how successful they can be.

How Do I Establish A Valuation For My Start Up??

Recently, I had the opportunity to attend a startup fund raising event. It was well attended with over 200 entrepreneurs and a healthy number of VC and angel investor organizations present. One of the topics that percolated to the top was the issue of valuation during the initial fund raising process.

This is certainly a sticky topic because valuation can be determined in a number of ways. Comparable company valuation, revenue multiples if they exist, amount of funds already invested in a company, the amount of product and IP, total market size, growth projections go into the mix determining what the company is worth.

Entrepreneurs and investors also have different agenda's that drive them to set a valuation. Entrepreneurs traditionally want to cede the least amount of equity for the most amount of capital. Investors highly value their financial contribution in a company resulting in them driving for a higher percentage of the company, and potentially a lower valuation to get the equity they think they deserve.

This process can certainly be stressful and contentious leading to a bad start for the relationship. It also can be short sighted if the parties involved do not think about the prospect of raising subsequent future rounds.

I have been involved in several start up fund raising and valuation efforts. My experience has resulted in the development of a contrarian view of how the negotiating parties should think about early round valuation.

In the early rounds of fund raising entrepreneurs push heavily for high valuations to keep the most amount of their company after the close of the round. They are also inclined to display the bravado factor because they are proud of what they have done and want everyone to know how great a company they have. They want a high valuation so they can get a big cash out if the company goes public or is sold. This latter point is shared by investors.

My contrarian view argues over hyping a company's valuation in the early rounds of funding is not necessarily the best approach for investors or founders. This approach could backfire resulting in long term funding objectives not being realized.

Why?

There is a very good chance that the initial business projections you use to justify your valuations will not completely pan out. All entrepreneurs want to believe that they have a killer application, a highly viral web presence and a game changing idea. This may be so but 9 times out of 10 it takes longer to realize the dream and more investment capital to make it so.

When you go on the open market for that next round of funding you do not want to be in a down round situation. If you fought for a very high valuation in round one this could be the scenario. Just because the company did not meet all of the expectations set in the first round does not mean it is not a good company. However, if you set your initial valuation very high you are going to create a perception that something is seriously broken if you do not hit all of the milestones.

This situation will make the original investors look bad and may even force them to not invest in the next round. A partner that sells a deal to his partners is putting themselves in a very vulnerable spot if the initial round valuation was considered too high.

If you do need another round you want your original investors to participate. If they do not it will make it very difficult for another VC to jump in.

If you are fortunate enough to get that next round of funding, after a relatively high initial round valuation, you could find yourself in a position where the investor does become more involved in the company after the investment.

The best approach in the early round(s) is to think about how long it might take to achieve the first real bump in revenue and traffic and price the deal appropriately. Take the ego out of the equation. What really matters is not how high your percentage ownership is or a high valuation. Think about the long term survival of your company and the need for several rounds of funding to achieve a happy exit strategy for all.

Investors are very aware of the fact that most companies are optimistic about their initial projections. If a management team is working hard and the market for the company's product or service is still large and growing the initial investors will most likely reinvest and encourage other investors to do so. Make this an easy decision for them.

Raising Seed Capital In The "Great" Recession

I have met many entrepreneurs looking to raise an initial round of funding during these challenging economic times. They are looking for an initial round of funding to get their companies going, build product, create an initial launch plan, etc. Based on their feedback and my experience working with investors I am not so sure that they are looking in the right places to find seed capital.

In my previous blog I outlines the 09 outlook for some of the high profile VC's in the Bay Area. Their commentary plus some supporting advice from my own portfolio of VC's indicate that the traditional VC's are not overwhelmingly interested in investing in seed rounds in 09. This is not to say that it is an absolute no for this round. However, they would prefer investing in companies with some "traction". Traction is defined as having a product, a web site with traffic and even some form of revenue to validate the model.

A seed round should not be confused with an A round of funding. The practical and semantic differences between these two categories are subtle and important. A traditional VC considers an A round to be the step beyond the seed round. So when you are approaching a VC you should get some clarity on what their funding strategy constraints are and what they mean by the A round of funding.

Seed round funding is also defined in terms for the amount of funding. Seed rounds are usually below 2 million and can be as low as a 1/4 million.

So where can you find sources of capital for a seed round?

There are institutions and organizations that focus on early seed round funding. The following is a list of these sources. This list is not a personal endorsement of the sources. I have used some of them and others I have not.

Tech Crunch - This is the online group that provides news and information on all kinds of technology and business activity. They run a competition that leads to a top 50 list of companies that they think will be winners. This is a great way to get your company visibility. It is not a direct funding source but can lead to visibility that then gets a seed round investor interested.

YCombinator: Partners - This group actually contradicts my previous statement about minimum investment. They provide funding of between 10 and 20K and incubate your company in their environment. This is a good way to determine if you really have something that is worthy of a seed round. I also suspect that they have connections with seed and A round investors.

Angelsoft - This is an online service that has you enter an application/business plan for review by investors. They have a pool of investors that look at your plan and indicate if they are interested. If they are interested it is great because you can start a dialogue and off you go. If not it is difficult to find out why your plan has not been well received.

National Angel Investor Forum - This organization solicits a brief overview of your business online and then arranges for a real person to contact you if they are interested. If you pass the initial screen their committee will decide if an investment is appropriate.

First Round Capital - This is a traditional VC outfit that focuses exclusively on seed round funding. They have a traditional partnership and are a well established fund.

Maples Investment - Maples is a fund that is very close to a traditional VC fund with the exception that it does not fit the traditional partner model. Mike Maples plays a big roll in determining who gets the money.

Founder Contact Group - There is a fairly well developed network of organizations that will help you raise funding for a seed round. Founder Contact Group is one. These groups are good if you need help in reaching investors and or need some help in positioning your venture and developing a pitch.

There are high net worth individuals that are also a good source of seed funding. However, they very rarely advertise their services. Some notable Silicon Valley personalities that have made serious money on their companies or on investments come to mind. Out of respect for them I will not mention their names. You either need to be "connected" or be referred to get into this circle. There are brokers that can help you locate these individuals. The brokers themselves will charge some finders fee to get an audience for your plan.

Good luck in getting your companies funded. Keep me informed of your progress.

Raising Seed Capital In A Recession

Yes, you can raise capital in this economy. Individuals and institutions are investing. Yes, the environment has created some unique challenges and advantages.

So what is different about the current state of the affairs?

1.) The VC's may not be your first stop on your way to raising money. Are the VC's still investing? Yes they are but they are also preoccupied with managing there current portfolio of companies through these tough times. They are a bit more conservative with new investments and are going to have a wait and see tendency. There are certainly exceptions. If you are in one of those domains where even a turkey can fly then perhaps your first stop is a VC. VC's are herding creatures and they feel most comfortable in areas where a number of other VC's are also invested. This is perceived as the perfect storm scenario where enough intelligent and savvy investors have decided that a certain domain is most likely to capture the imagination and pocketbooks of a very large number of consumers. The iPhone application space is a classic example. This could be a big market that can support a number of successful companies.

2.) If your idea is not in the perfect storm sweet spot then the individual investor route is a better approach. High net worth individuals are in an interesting position right now. Where are you going to invest your money? Certainly the stock market appears very risky and volatile. High yielding bonds maybe. However, an investor has to have confidence that the principal will be still there at the end of the term. Also, you might get a 10% return. Is that really an investment? Where might you get a 100% return or better on your investment? A startup company might be a very good alternative investment.

Startups are transparent allowing an investor to really understand what is going on with the business. An individual invested in a small startup really gets to know the people, processes and economics of the business.

Many high net worth individuals are or were entrepreneurs and they got rich being entrepreneurs. It is their money and they are usually not beholden to an investment group. They can make decisions about their money. They are also usually very good at picking winners because they know what a winner looks and feels like. They can also move faster then a VC or an investment group. They can bring expertise and advice to your team. They usually have relevant business expertise that you might be able to take advantage of.

Overall, I am heavily weighted in the individual investor camp for raising funds in this environment. It appears to be a good way to get a seed round and a good start in a relatively short period of time. Certainly VC's should not be discounted given the right circumstances.

No matter what route you pursue to raise capital there are certain ways to have a higher likelihood of being successful at securing funding. Also finding individual investors or open minded VC's is a skill in an of itself. This is a subject for a future blog entry.

Stay Tuned and Good Luck!!!