People & Dreams

Archivo -junio 2012

Why Mimiboards are spreading across Africa

South Africa-based Umuntu Media’s Mimiboard has emerged the winner of the Nairobi Open Innovation Summit App Demo Competition, beating ten other apps from Africa.

This virtual notice board service is quietly but surely disrupting traditional publishing and content aggregation across the continent. Mimiboard, which is expanding across the continent, will allow citizen reporters to upload news about entertainment, sports, business, social and political issues in the communities live as it happens.

Mimiboard CEO Johan Nel, who took home a Nokia Lumia 800 from the competition, says that the service is a virtual, ’3.0 version noticeboard’ but works just like a traditional, wooden version. According to Nel, Mimiboards are set to help people in communities, cities and organisations share issues in real-time with their groups, as any member can post or leave a notice for others.

Screen Shot 2012 06 11 at 11.56.14 520x312 Why Mimiboards are spreading across Africa

Nel believes that the portals will deliver relevant local content with a focus on entertainment, property, jobs, news and even politics to users across the two countries. His dream is to localise news and conversations for Africans by Africans. In East Africa, Umuntu Media is already working with established media houses including PC Tech magazine.

Screen Shot 2012 06 11 at 11.42.11 220x224 Why Mimiboards are spreading across AfricaAlbert Mucunguzi, CEO of PC Tech said,” It is great for us to be working with continental innovators like Umuntu Media, and advent of Mimiboards will certainly revolutionalize the way African communities engage with each other.” PC Tech is a monthly technology magazine that features African ICT innovation, personal and enterprise technology initiatives, social media, product and software reviews and research on ICT in Africa.

Mimiboard’s claim of solving problems publishers face during news gathering and engaging audience in the process is what is driving their expansion. Recently, Mimiboard launched its information portals (iportals) in Uganda and Rwanda and is eyeing a spread across the continent. “Publishers all over the world have the same challenges: Keeping users engaged, playing in the social media area, revenue and maintaining a community,” said Nel.

Screen Shot 2012 06 11 at 11.55.20 520x312 Why Mimiboards are spreading across Africa

Umuntu Media has also partnered with The Zimbabwean, a newspaper, and has taken Mimiboards to Western Cape, KwaZulu-Natal, Limpopo, and Gauteng regions of South Africa and to those online looking for relevant local content.

Analysts say the Mimiboards, which mostly rely on mobile, are a great plus for the continent. According to a recent report by Informa Telecoms & Media, Africa has become the second most connected region in the world in terms of mobile subscription count, up from fourth place at end of 2010. The report further claims there were over 616 million mobile subscriptions in Africa at the end of September 2011, which means the mobile market on the continent is second only to Asia-Pacific in terms of mobile subscription numbers.

Nel, a former digital executive at SA’s giant media firm Naspers, unveiled the Mimiboard in February at the Mobile Web East Africa conference in Nairobi, Kenya. Mimiboards are actively in use in Kenya, Tanzania and major parts of West Africa. Umuntu had earlier this year launched iZambia, iRwanda, iBotswana, and now iNamibia.

How to Fund a Startup

When the company goes public, the SEC will carefully study all prior issuances of stock by the company and demand that it take immediate action to cure any past violations of securities laws. Those remedial actions can delay, stall or even kill the IPO.November 2005

Venture funding works like gears. A typical startup goes through several rounds of funding, and at each round you want to take just enough money to reach the speed where you can shift into the next gear.

Few startups get it quite right. Many are underfunded. A few are overfunded, which is like trying to start driving in third gear.

I think it would help founders to understand funding better—not just the mechanics of it, but what investors are thinking. I was surprised recently when I realized that all the worst problems we faced in our startup were due not to competitors, but investors. Dealing with competitors was easy by comparison.

I don’t mean to suggest that our investors were nothing but a drag on us. They were helpful in negotiating deals, for example. I mean more that conflicts with investors are particularly nasty. Competitors punch you in the jaw, but investors have you by the balls.

Apparently our situation was not unusual. And if trouble with investors is one of the biggest threats to a startup, managing them is one of the most important skills founders need to learn.

Let’s start by talking about the five sources of startup funding. Then we’ll trace the life of a hypothetical (very fortunate) startup as it shifts gears through successive rounds.

Friends and Family

A lot of startups get their first funding from friends and family. Excite did, for example: after the founders graduated from college, they borrowed $15,000 from their parents to start a company. With the help of some part-time jobs they made it last 18 months.

If your friends or family happen to be rich, the line blurs between them and angel investors. At Viaweb we got our first $10,000 of seed money from our friend Julian, but he was sufficiently rich that it’s hard to say whether he should be classified as a friend or angel. He was also a lawyer, which was great, because it meant we didn’t have to pay legal bills out of that initial small sum.

The advantage of raising money from friends and family is that they’re easy to find. You already know them. There are three main disadvantages: you mix together your business and personal life; they will probably not be as well connected as angels or venture firms; and they may not be accredited investors, which could complicate your life later.

The SEC defines an «accredited investor» as someone with over a million dollars in liquid assets or an income of over $200,000 a year. The regulatory burden is much lower if a company’s shareholders are all accredited investors. Once you take money from the general public you’re more restricted in what you can do. [1]

A startup’s life will be more complicated, legally, if any of the investors aren’t accredited. In an IPO, it might not merely add expense, but change the outcome. A lawyer I asked about it said:

Of course the odds of any given startup doing an IPO are small. But not as small as they might seem. A lot of startups that end up going public didn’t seem likely to at first. (Who could have guessed that the company Wozniak and Jobs started in their spare time selling plans for microcomputers would yield one of the biggest IPOs of the decade?) Much of the value of a startup consists of that tiny probability multiplied by the huge outcome.

It wasn’t because they weren’t accredited investors that I didn’t ask my parents for seed money, though. When we were starting Viaweb, I didn’t know about the concept of an accredited investor, and didn’t stop to think about the value of investors’ connections. The reason I didn’t take money from my parents was that I didn’t want them to lose it.


Another way to fund a startup is to get a job. The best sort of job is a consulting project in which you can build whatever software you wanted to sell as a startup. Then you can gradually transform yourself from a consulting company into a product company, and have your clients pay your development expenses.

This is a good plan for someone with kids, because it takes most of the risk out of starting a startup. There never has to be a time when you have no revenues. Risk and reward are usually proportionate, however: you should expect a plan that cuts the risk of starting a startup also to cut the average return. In this case, you trade decreased financial risk for increased risk that your company won’t succeed as a startup.

But isn’t the consulting company itself a startup? No, not generally. A company has to be more than small and newly founded to be a startup. There are millions of small businesses in America, but only a few thousand are startups. To be a startup, a company has to be a product business, not a service business. By which I mean not that it has to make something physical, but that it has to have one thing it sells to many people, rather than doing custom work for individual clients. Custom work doesn’t scale. To be a startup you need to be the band that sells a million copies of a song, not the band that makes money by playing at individual weddings and bar mitzvahs.

The trouble with consulting is that clients have an awkward habit of calling you on the phone. Most startups operate close to the margin of failure, and the distraction of having to deal with clients could be enough to put you over the edge. Especially if you have competitors who get to work full time on just being a startup.

So you have to be very disciplined if you take the consulting route. You have to work actively to prevent your company growing into a «weed tree,» dependent on this source of easy but low-margin money. [2]

Indeed, the biggest danger of consulting may be that it gives you an excuse for failure. In a startup, as in grad school, a lot of what ends up driving you are the expectations of your family and friends. Once you start a startup and tell everyone that’s what you’re doing, you’re now on a path labelled «get rich or bust.» You now have to get rich, or you’ve failed.

Fear of failure is an extraordinarily powerful force. Usually it prevents people from starting things, but once you publish some definite ambition, it switches directions and starts working in your favor. I think it’s a pretty clever piece of jiujitsu to set this irresistible force against the slightly less immovable object of becoming rich. You won’t have it driving you if your stated ambition is merely to start a consulting company that you will one day morph into a startup.

An advantage of consulting, as a way to develop a product, is that you know you’re making something at least one customer wants. But if you have what it takes to start a startup you should have sufficient vision not to need this crutch.

Angel Investors

Angels are individual rich people. The word was first used for backers of Broadway plays, but now applies to individual investors generally. Angels who’ve made money in technology are preferable, for two reasons: they understand your situation, and they’re a source of contacts and advice.

The contacts and advice can be more important than the money. When took money from investors, they took money from, among others, Tim O’Reilly. The amount he put in was small compared to the VCs who led the round, but Tim is a smart and influential guy and it’s good to have him on your side.

You can do whatever you want with money from consulting or friends and family. With angels we’re now talking about venture funding proper, so it’s time to introduce the concept of exit strategy. Younger would-be founders are often surprised that investors expect them either to sell the company or go public. The reason is that investors need to get their capital back. They’ll only consider companies that have an exit strategy—meaning companies that could get bought or go public.

This is not as selfish as it sounds. There are few large, private technology companies. Those that don’t fail all seem to get bought or go public. The reason is that employees are investors too—of their time—and they want just as much to be able to cash out. If your competitors offer employees stock options that might make them rich, while you make it clear you plan to stay private, your competitors will get the best people. So the principle of an «exit» is not just something forced on startups by investors, but part of what it means to be a startup.

Another concept we need to introduce now is valuation. When someone buys shares in a company, that implicitly establishes a value for it. If someone pays $20,000 for 10% of a company, the company is in theory worth $200,000. I say «in theory» because in early stage investing, valuations are voodoo. As a company gets more established, its valuation gets closer to an actual market value. But in a newly founded startup, the valuation number is just an artifact of the respective contributions of everyone involved.

Startups often «pay» investors who will help the company in some way by letting them invest at low valuations. If I had a startup and Steve Jobs wanted to invest in it, I’d give him the stock for $10, just to be able to brag that he was an investor. Unfortunately, it’s impractical (if not illegal) to adjust the valuation of the company up and down for each investor. Startups’ valuations are supposed to rise over time. So if you’re going to sell cheap stock to eminent angels, do it early, when it’s natural for the company to have a low valuation.

Some angel investors join together in syndicates. Any city where people start startups will have one or more of them. In Boston the biggest is the Common Angels. In the Bay Area it’s the Band of Angels. You can find groups near you through the Angel Capital Association. [3] However, most angel investors don’t belong to these groups. In fact, the more prominent the angel, the less likely they are to belong to a group.

Some angel groups charge you money to pitch your idea to them. Needless to say, you should never do this.

One of the dangers of taking investment from individual angels, rather than through an angel group or investment firm, is that they have less reputation to protect. A big-name VC firm will not screw you too outrageously, because other founders would avoid them if word got out. With individual angels you don’t have this protection, as we found to our dismay in our own startup. In many startups’ lives there comes a point when you’re at the investors’ mercy—when you’re out of money and the only place to get more is your existing investors. When we got into such a scrape, our investors took advantage of it in a way that a name-brand VC probably wouldn’t have.

Angels have a corresponding advantage, however: they’re also not bound by all the rules that VC firms are. And so they can, for example, allow founders to cash out partially in a funding round, by selling some of their stock directly to the investors. I think this will become more common; the average founder is eager to do it, and selling, say, half a million dollars worth of stock will not, as VCs fear, cause most founders to be any less committed to the business.

The same angels who tried to screw us also let us do this, and so on balance I’m grateful rather than angry. (As in families, relations between founders and investors can be complicated.)

The best way to find angel investors is through personal introductions. You could try to cold-call angel groups near you, but angels, like VCs, will pay more attention to deals recommended by someone they respect.

Deal terms with angels vary a lot. There are no generally accepted standards. Sometimes angels’ deal terms are as fearsome as VCs’. Other angels, particularly in the earliest stages, will invest based on a two-page agreement.

Angels who only invest occasionally may not themselves know what terms they want. They just want to invest in this startup. What kind of anti-dilution protection do they want? Hell if they know. In these situations, the deal terms tend to be random: the angel asks his lawyer to create a vanilla agreement, and the terms end up being whatever the lawyer considers vanilla. Which in practice usually means, whatever existing agreement he finds lying around his firm. (Few legal documents are created from scratch.)

These heaps o’ boilerplate are a problem for small startups, because they tend to grow into the union of all preceding documents. I know of one startup that got from an angel investor what amounted to a five hundred pound handshake: after deciding to invest, the angel presented them with a 70-page agreement. The startup didn’t have enough money to pay a lawyer even to read it, let alone negotiate the terms, so the deal fell through.

One solution to this problem would be to have the startup’s lawyer produce the agreement, instead of the angel’s. Some angels might balk at this, but others would probably welcome it.

Inexperienced angels often get cold feet when the time comes to write that big check. In our startup, one of the two angels in the initial round took months to pay us, and only did after repeated nagging from our lawyer, who was also, fortunately, his lawyer.

It’s obvious why investors delay. Investing in startups is risky! When a company is only two months old, every day you wait gives you 1.7% more data about their trajectory. But the investor is already being compensated for that risk in the low price of the stock, so it is unfair to delay.

Fair or not, investors do it if you let them. Even VCs do it. And funding delays are a big distraction for founders, who ought to be working on their company, not worrying about investors. What’s a startup to do? With both investors and acquirers, the only leverage you have is competition. If an investor knows you have other investors lined up, he’ll be a lot more eager to close– and not just because he’ll worry about losing the deal, but because if other investors are interested, you must be worth investing in. It’s the same with acquisitions. No one wants to buy you till someone else wants to buy you, and then everyone wants to buy you.

The key to closing deals is never to stop pursuing alternatives. When an investor says he wants to invest in you, or an acquirer says they want to buy you, don’t believe it till you get the check. Your natural tendency when an investor says yes will be to relax and go back to writing code. Alas, you can’t; you have to keep looking for more investors, if only to get this one to act. [4]

Seed Funding Firms

Seed firms are like angels in that they invest relatively small amounts at early stages, but like VCs in that they’re companies that do it as a business, rather than individuals making occasional investments on the side.

Till now, nearly all seed firms have been so-called «incubators,» so Y Combinator gets called one too, though the only thing we have in common is that we invest in the earliest phase.

According to the National Association of Business Incubators, there are about 800 incubators in the US. This is an astounding number, because I know the founders of a lot of startups, and I can’t think of one that began in an incubator.

What is an incubator? I’m not sure myself. The defining quality seems to be that you work in their space. That’s where the name «incubator» comes from. They seem to vary a great deal in other respects. At one extreme is the sort of pork-barrel project where a town gets money from the state government to renovate a vacant building as a «high-tech incubator,» as if it were merely lack of the right sort of office space that had till now prevented the town from becoming a startup hub. At the other extreme are places like Idealab, which generates ideas for new startups internally and hires people to work for them.

The classic Bubble incubators, most of which now seem to be dead, were like VC firms except that they took a much bigger role in the startups they funded. In addition to working in their space, you were supposed to use their office staff, lawyers, accountants, and so on.

Whereas incubators tend (or tended) to exert more control than VCs, Y Combinator exerts less. And we think it’s better if startups operate out of their own premises, however crappy, than the offices of their investors. So it’s annoying that we keep getting called an «incubator,» but perhaps inevitable, because there’s only one of us so far and no word yet for what we are. If we have to be called something, the obvious name would be «excubator.» (The name is more excusable if one considers it as meaning that we enable people to escape cubicles.)

Because seed firms are companies rather than individual people, reaching them is easier than reaching angels. Just go to their web site and send them an email. The importance of personal introductions varies, but is less than with angels or VCs.

The fact that seed firms are companies also means the investment process is more standardized. (This is generally true with angel groups too.) Seed firms will probably have set deal terms they use for every startup they fund. The fact that the deal terms are standard doesn’t mean they’re favorable to you, but if other startups have signed the same agreements and things went well for them, it’s a sign the terms are reasonable.

Seed firms differ from angels and VCs in that they invest exclusively in the earliest phases—often when the company is still just an idea. Angels and even VC firms occasionally do this, but they also invest at later stages.

The problems are different in the early stages. For example, in the first couple months a startup may completely redefine their idea. So seed investors usually care less about the idea than the people. This is true of all venture funding, but especially so in the seed stage.

Like VCs, one of the advantages of seed firms is the advice they offer. But because seed firms operate in an earlier phase, they need to offer different kinds of advice. For example, a seed firm should be able to give advice about how to approach VCs, which VCs obviously don’t need to do; whereas VCs should be able to give advice about how to hire an «executive team,» which is not an issue in the seed stage.

In the earliest phases, a lot of the problems are technical, so seed firms should be able to help with technical as well as business problems.

Seed firms and angel investors generally want to invest in the initial phases of a startup, then hand them off to VC firms for the next round. Occasionally startups go from seed funding direct to acquisition, however, and I expect this to become increasingly common.

Google has been aggressively pursuing this route, and now Yahoo is too. Both now compete directly with VCs. And this is a smart move. Why wait for further funding rounds to jack up a startup’s price? When a startup reaches the point where VCs have enough information to invest in it, the acquirer should have enough information to buy it. More information, in fact; with their technical depth, the acquirers should be better at picking winners than VCs.

Venture Capital Funds

VC firms are like seed firms in that they’re actual companies, but they invest other people’s money, and much larger amounts of it. VC investments average several million dollars. So they tend to come later in the life of a startup, are harder to get, and come with tougher terms.

The word «venture capitalist» is sometimes used loosely for any venture investor, but there is a sharp difference between VCs and other investors: VC firms are organized asfunds, much like hedge funds or mutual funds. The fund managers, who are called «general partners,» get about 2% of the fund annually as a management fee, plus about 20% of the fund’s gains.

There is a very sharp dropoff in performance among VC firms, because in the VC business both success and failure are self-perpetuating. When an investment scores spectacularly, as Google did for Kleiner and Sequoia, it generates a lot of good publicity for the VCs. And many founders prefer to take money from successful VC firms, because of the legitimacy it confers. Hence a vicious (for the losers) cycle: VC firms that have been doing badly will only get the deals the bigger fish have rejected, causing them to continue to do badly.

As a result, of the thousand or so VC funds in the US now, only about 50 are likely to make money, and it is very hard for a new fund to break into this group.

In a sense, the lower-tier VC firms are a bargain for founders. They may not be quite as smart or as well connected as the big-name firms, but they are much hungrier for deals. This means you should be able to get better terms from them.

Better how? The most obvious is valuation: they’ll take less of your company. But as well as money, there’s power. I think founders will increasingly be able to stay on as CEO, and on terms that will make it fairly hard to fire them later.

The most dramatic change, I predict, is that VCs will allow founders to cash out partially by selling some of their stock direct to the VC firm. VCs have traditionally resisted letting founders get anything before the ultimate «liquidity event.» But they’re also desperate for deals. And since I know from my own experience that the rule against buying stock from founders is a stupid one, this is a natural place for things to give as venture funding becomes more and more a seller’s market.

The disadvantage of taking money from less known firms is that people will assume, correctly or not, that you were turned down by the more exalted ones. But, like where you went to college, the name of your VC stops mattering once you have some performance to measure. So the more confident you are, the less you need a brand-name VC. We funded Viaweb entirely with angel money; it never occurred to us that the backing of a well known VC firm would make us seem more impressive. [5]

Another danger of less known firms is that, like angels, they have less reputation to protect. I suspect it’s the lower-tier firms that are responsible for most of the tricks that have given VCs such a bad reputation among hackers. They are doubly hosed: the general partners themselves are less able, and yet they have harder problems to solve, because the top VCs skim off all the best deals, leaving the lower-tier firms exactly the startups that are likely to blow up.

For example, lower-tier firms are much more likely to pretend to want to do a deal with you just to lock you up while they decide if they really want to. One experienced CFO said:

The better ones usually will not give a term sheet unless they really want to do a deal. The second or third tier firms have a much higher break rate—it could be as high as 50%.

It’s obvious why: the lower-tier firms’ biggest fear, when chance throws them a bone, is that one of the big dogs will notice and take it away. The big dogs don’t have worry about that.

Falling victim to this trick could really hurt you. As one VC told me:

If you were talking to four VCs, told three of them that you accepted a term sheet, and then have to call them back to tell them you were just kidding, you are absolutely damaged goods.

Here’s a partial solution: when a VC offers you a term sheet, ask how many of their last 10 term sheets turned into deals. This will at least force them to lie outright if they want to mislead you.

Not all the people who work at VC firms are partners. Most firms also have a handful of junior employees called something like associates or analysts. If you get a call from a VC firm, go to their web site and check whether the person you talked to is a partner. Odds are it will be a junior person; they scour the web looking for startups their bosses could invest in. The junior people will tend to seem very positive about your company. They’re not pretending; they want to believe you’re a hot prospect, because it would be a huge coup for them if their firm invested in a company they discovered. Don’t be misled by this optimism. It’s the partners who decide, and they view things with a colder eye.

Because VCs invest large amounts, the money comes with more restrictions. Most only come into effect if the company gets into trouble. For example, VCs generally write it into the deal that in any sale, they get their investment back first. So if the company gets sold at a low price, the founders could get nothing. Some VCs now require that in any sale they get 4x their investment back before the common stock holders (that is, you) get anything, but this is an abuse that should be resisted.

Another difference with large investments is that the founders are usually required to accept «vesting»—to surrender their stock and earn it back over the next 4-5 years. VCs don’t want to invest millions in a company the founders could just walk away from. Financially, vesting has little effect, but in some situations it could mean founders will have less power. If VCs got de facto control of the company and fired one of the founders, he’d lose any unvested stock unless there was specific protection against this. So vesting would in that situation force founders to toe the line.

The most noticeable change when a startup takes serious funding is that the founders will no longer have complete control. Ten years ago VCs used to insist that founders step down as CEO and hand the job over to a business guy they supplied. This is less the rule now, partly because the disasters of the Bubble showed that generic business guys don’t make such great CEOs.

But while founders will increasingly be able to stay on as CEO, they’ll have to cede some power, because the board of directors will become more powerful. In the seed stage, the board is generally a formality; if you want to talk to the other board members, you just yell into the next room. This stops with VC-scale money. In a typical VC funding deal, the board of directors might be composed of two VCs, two founders, and one outside person acceptable to both. The board will have ultimate power, which means the founders now have to convince instead of commanding.

This is not as bad as it sounds, however. Bill Gates is in the same position; he doesn’t have majority control of Microsoft; in principle he also has to convince instead of commanding. And yet he seems pretty commanding, doesn’t he? As long as things are going smoothly, boards don’t interfere much. The danger comes when there’s a bump in the road, as happened to Steve Jobs at Apple.

Like angels, VCs prefer to invest in deals that come to them through people they know. So while nearly all VC funds have some address you can send your business plan to, VCs privately admit the chance of getting funding by this route is near zero. One recently told me that he did not know a single startup that got funded this way.

I suspect VCs accept business plans «over the transom» more as a way to keep tabs on industry trends than as a source of deals. In fact, I would strongly advise against mailing your business plan randomly to VCs, because they treat this as evidence of laziness. Do the extra work of getting personal introductions. As one VC put it:

I’m not hard to find. I know a lot of people. If you can’t find some way to reach me, how are you going to create a successful company?

One of the most difficult problems for startup founders is deciding when to approach VCs. You really only get one chance, because they rely heavily on first impressions. And you can’t approach some and save others for later, because (a) they ask who else you’ve talked to and when and (b) they talk among themselves. If you’re talking to one VC and he finds out that you were rejected by another several months ago, you’ll definitely seem shopworn.

So when do you approach VCs? When you can convince them. If the founders have impressive resumes and the idea isn’t hard to understand, you could approach VCs quite early. Whereas if the founders are unknown and the idea is very novel, you might have to launch the thing and show that users loved it before VCs would be convinced.

If several VCs are interested in you, they will sometimes be willing to split the deal between them. They’re more likely to do this if they’re close in the VC pecking order. Such deals may be a net win for founders, because you get multiple VCs interested in your success, and you can ask each for advice about the other. One founder I know wrote:

Two-firm deals are great. It costs you a little more equity, but being able to play the two firms off each other (as well as ask one if the other is being out of line) is invaluable.

When you do negotiate with VCs, remember that they’ve done this a lot more than you have. They’ve invested in dozens of startups, whereas this is probably the first you’ve founded. But don’t let them or the situation intimidate you. The average founder is smarter than the average VC. So just do what you’d do in any complex, unfamiliar situation: proceed deliberately, and question anything that seems odd.

It is, unfortunately, common for VCs to put terms in an agreement whose consequences surprise founders later, and also common for VCs to defend things they do by saying that they’re standard in the industry. Standard, schmandard; the whole industry is only a few decades old, and rapidly evolving. The concept of «standard» is a useful one when you’re operating on a small scale (Y Combinator uses identical terms for every deal because for tiny seed-stage investments it’s not worth the overhead of negotiating individual deals), but it doesn’t apply at the VC level. On that scale, every negotiation is unique.

Most successful startups get money from more than one of the preceding five sources.[6] And, confusingly, the names of funding sources also tend to be used as the names of different rounds. The best way to explain how it all works is to follow the case of a hypothetical startup.

Stage 1: Seed Round

Our startup begins when a group of three friends have an idea– either an idea for something they might build, or simply the idea «let’s start a company.» Presumably they already have some source of food and shelter. But if you have food and shelter, you probably also have something you’re supposed to be working on: either classwork, or a job. So if you want to work full-time on a startup, your money situation will probably change too.

A lot of startup founders say they started the company without any idea of what they planned to do. This is actually less common than it seems: many have to claim they thought of the idea after quitting because otherwise their former employer would own it.

The three friends decide to take the leap. Since most startups are in competitive businesses, you not only want to work full-time on them, but more than full-time. So some or all of the friends quit their jobs or leave school. (Some of the founders in a startup can stay in grad school, but at least one has to make the company his full-time job.)

They’re going to run the company out of one of their apartments at first, and since they don’t have any users they don’t have to pay much for infrastructure. Their main expenses are setting up the company, which costs a couple thousand dollars in legal work and registration fees, and the living expenses of the founders.

The phrase «seed investment» covers a broad range. To some VC firms it means $500,000, but to most startups it means several months’ living expenses. We’ll suppose our group of friends start with $15,000 from their friend’s rich uncle, who they give 5% of the company in return. There’s only common stock at this stage. They leave 20% as an options pool for later employees (but they set things up so that they can issue this stock to themselves if they get bought early and most is still unissued), and the three founders each get 25%.

By living really cheaply they think they can make the remaining money last five months. When you have five months’ runway left, how soon do you need to start looking for your next round? Answer: immediately. It takes time to find investors, and time (always more than you expect) for the deal to close even after they say yes. So if our group of founders know what they’re doing they’ll start sniffing around for angel investors right away. But of course their main job is to build version 1 of their software.

The friends might have liked to have more money in this first phase, but being slightly underfunded teaches them an important lesson. For a startup, cheapness is power. The lower your costs, the more options you have—not just at this stage, but at every point till you’re profitable. When you have a high «burn rate,» you’re always under time pressure, which means (a) you don’t have time for your ideas to evolve, and (b) you’re often forced to take deals you don’t like.

Every startup’s rule should be: spend little, and work fast.

After ten weeks’ work the three friends have built a prototype that gives one a taste of what their product will do. It’s not what they originally set out to do—in the process of writing it, they had some new ideas. And it only does a fraction of what the finished product will do, but that fraction includes stuff that no one else has done before.

They’ve also written at least a skeleton business plan, addressing the five fundamental questions: what they’re going to do, why users need it, how large the market is, how they’ll make money, and who the competitors are and why this company is going to beat them. (That last has to be more specific than «they suck» or «we’ll work really hard.»)

If you have to choose between spending time on the demo or the business plan, spend most on the demo. Software is not only more convincing, but a better way to explore ideas.

Stage 2: Angel Round

While writing the prototype, the group has been traversing their network of friends in search of angel investors. They find some just as the prototype is demoable. When they demo it, one of the angels is willing to invest. Now the group is looking for more money: they want enough to last for a year, and maybe to hire a couple friends. So they’re going to raise $200,000.

The angel agrees to invest at a pre-money valuation of $1 million. The company issues $200,000 worth of new shares to the angel; if there were 1000 shares before the deal, this means 200 additional shares. The angel now owns 200/1200 shares, or a sixth of the company, and all the previous shareholders’ percentage ownership is diluted by a sixth. After the deal, the capitalization table looks like this: shareholder shares percent ——————————- angel 200 16.7 uncle 50 4.2 each founder 250 20.8 option pool 200 16.7 —- —– total 1200 100 To keep things simple, I had the angel do a straight cash for stock deal. In reality the angel might be more likely to make the investment in the form of a convertible loan. A convertible loan is a loan that can be converted into stock later; it works out the same as a stock purchase in the end, but gives the angel more protection against being squashed by VCs in future rounds.

Who pays the legal bills for this deal? The startup, remember, only has a couple thousand left. In practice this turns out to be a sticky problem that usually gets solved in some improvised way. Maybe the startup can find lawyers who will do it cheaply in the hope of future work if the startup succeeds. Maybe someone has a lawyer friend. Maybe the angel pays for his lawyer to represent both sides. (Make sure if you take the latter route that the lawyer is representing you rather than merely advising you, or his only duty is to the investor.)

An angel investing $200k would probably expect a seat on the board of directors. He might also want preferred stock, meaning a special class of stock that has some additional rights over the common stock everyone else has. Typically these rights include vetoes over major strategic decisions, protection against being diluted in future rounds, and the right to get one’s investment back first if the company is sold.

Some investors might expect the founders to accept vesting for a sum this size, and others wouldn’t. VCs are more likely to require vesting than angels. At Viaweb we managed to raise $2.5 million from angels without ever accepting vesting, largely because we were so inexperienced that we were appalled at the idea. In practice this turned out to be good, because it made us harder to push around.

Our experience was unusual; vesting is the norm for amounts that size. Y Combinator doesn’t require vesting, because (a) we invest such small amounts, and (b) we think it’s unnecessary, and that the hope of getting rich is enough motivation to keep founders at work. But maybe if we were investing millions we would think differently.

I should add that vesting is also a way for founders to protect themselves against one another. It solves the problem of what to do if one of the founders quits. So some founders impose it on themselves when they start the company.

The angel deal takes two weeks to close, so we are now three months into the life of the company.

The point after you get the first big chunk of angel money will usually be the happiest phase in a startup’s life. It’s a lot like being a postdoc: you have no immediate financial worries, and few responsibilities. You get to work on juicy kinds of work, like designing software. You don’t have to spend time on bureaucratic stuff, because you haven’t hired any bureaucrats yet. Enjoy it while it lasts, and get as much done as you can, because you will never again be so productive.

With an apparently inexhaustible sum of money sitting safely in the bank, the founders happily set to work turning their prototype into something they can release. They hire one of their friends—at first just as a consultant, so they can try him out—and then a month later as employee #1. They pay him the smallest salary he can live on, plus 3% of the company in restricted stock, vesting over four years. (So after this the option pool is down to 13.7%). [7] They also spend a little money on a freelance graphic designer.

How much stock do you give early employees? That varies so much that there’s no conventional number. If you get someone really good, really early, it might be wise to give him as much stock as the founders. The one universal rule is that the amount of stock an employee gets decreases polynomially with the age of the company. In other words, you get rich as a power of how early you were. So if some friends want you to come work for their startup, don’t wait several months before deciding.

A month later, at the end of month four, our group of founders have something they can launch. Gradually through word of mouth they start to get users. Seeing the system in use by real users—people they don’t know—gives them lots of new ideas. Also they find they now worry obsessively about the status of their server. (How relaxing founders’ lives must have been when startups wrote VisiCalc.)

By the end of month six, the system is starting to have a solid core of features, and a small but devoted following. People start to write about it, and the founders are starting to feel like experts in their field.

We’ll assume that their startup is one that could put millions more to use. Perhaps they need to spend a lot on marketing, or build some kind of expensive infrastructure, or hire highly paid salesmen. So they decide to start talking to VCs. They get introductions to VCs from various sources: their angel investor connects them with a couple; they meet a few at conferences; a couple VCs call them after reading about them.

Step 3: Series A Round

Armed with their now somewhat fleshed-out business plan and able to demo a real, working system, the founders visit the VCs they have introductions to. They find the VCs intimidating and inscrutable. They all ask the same question: who else have you pitched to? (VCs are like high school girls: they’re acutely aware of their position in the VC pecking order, and their interest in a company is a function of the interest other VCs show in it.)

One of the VC firms says they want to invest and offers the founders a term sheet. A term sheet is a summary of what the deal terms will be when and if they do a deal; lawyers will fill in the details later. By accepting the term sheet, the startup agrees to turn away other VCs for some set amount of time while this firm does the «due diligence» required for the deal. Due diligence is the corporate equivalent of a background check: the purpose is to uncover any hidden bombs that might sink the company later, like serious design flaws in the product, pending lawsuits against the company, intellectual property issues, and so on. VCs’ legal and financial due diligence is pretty thorough, but the technical due diligence is generally a joke. [8]

The due diligence discloses no ticking bombs, and six weeks later they go ahead with the deal. Here are the terms: a $2 million investment at a pre-money valuation of $4 million, meaning that after the deal closes the VCs will own a third of the company (2 / (4 + 2)). The VCs also insist that prior to the deal the option pool be enlarged by an additional hundred shares. So the total number of new shares issued is 750, and the cap table becomes: shareholder shares percent ——————————- VCs 650 33.3 angel 200 10.3 uncle 50 2.6 each founder 250 12.8 employee 36* 1.8 *unvested option pool 264 13.5 —- —– total 1950 100 This picture is unrealistic in several respects. For example, while the percentages might end up looking like this, it’s unlikely that the VCs would keep the existing numbers of shares. In fact, every bit of the startup’s paperwork would probably be replaced, as if the company were being founded anew. Also, the money might come in several tranches, the later ones subject to various conditions—though this is apparently more common in deals with lower-tier VCs (whose lot in life is to fund more dubious startups) than with the top firms.

And of course any VCs reading this are probably rolling on the floor laughing at how my hypothetical VCs let the angel keep his 10.3 of the company. I admit, this is the Bambi version; in simplifying the picture, I’ve also made everyone nicer. In the real world, VCs regard angels the way a jealous husband feels about his wife’s previous boyfriends. To them the company didn’t exist before they invested in it. [9]

I don’t want to give the impression you have to do an angel round before going to VCs. In this example I stretched things out to show multiple sources of funding in action. Some startups could go directly from seed funding to a VC round; several of the companies we’ve funded have.

The founders are required to vest their shares over four years, and the board is now reconstituted to consist of two VCs, two founders, and a fifth person acceptable to both. The angel investor cheerfully surrenders his board seat.

At this point there is nothing new our startup can teach us about funding—or at least, nothing good. [10] The startup will almost certainly hire more people at this point; those millions must be put to work, after all. The company may do additional funding rounds, presumably at higher valuations. They may if they are extraordinarily fortunate do an IPO, which we should remember is also in principle a round of funding, regardless of its de facto purpose. But that, if not beyond the bounds of possibility, is beyond the scope of this article.

Deals Fall Through

Anyone who’s been through a startup will find the preceding portrait to be missing something: disasters. If there’s one thing all startups have in common, it’s that something is always going wrong. And nowhere more than in matters of funding.

For example, our hypothetical startup never spent more than half of one round before securing the next. That’s more ideal than typical. Many startups—even successful ones—come close to running out of money at some point. Terrible things happen to startups when they run out of money, because they’re designed for growth, not adversity.

But the most unrealistic thing about the series of deals I’ve described is that they all closed. In the startup world, closing is not what deals do. What deals do is fall through. If you’re starting a startup you would do well to remember that. Birds fly; fish swim; deals fall through.

Why? Partly the reason deals seem to fall through so often is that you lie to yourself. You want the deal to close, so you start to believe it will. But even correcting for this, startup deals fall through alarmingly often—far more often than, say, deals to buy real estate. The reason is that it’s such a risky environment. People about to fund or acquire a startup are prone to wicked cases of buyer’s remorse. They don’t really grasp the risk they’re taking till the deal’s about to close. And then they panic. And not just inexperienced angel investors, but big companies too.

So if you’re a startup founder wondering why some angel investor isn’t returning your phone calls, you can at least take comfort in the thought that the same thing is happening to other deals a hundred times the size.

The example of a startup’s history that I’ve presented is like a skeleton—accurate so far as it goes, but needing to be fleshed out to be a complete picture. To get a complete picture, just add in every possible disaster.

A frightening prospect? In a way. And yet also in a way encouraging. The very uncertainty of startups frightens away almost everyone. People overvalue stability—especially young people, who ironically need it least. And so in starting a startup, as in any really bold undertaking, merely deciding to do it gets you halfway there. On the day of the race, most of the other runners won’t show up.


[1] The aim of such regulations is to protect widows and orphans from crooked investment schemes; people with a million dollars in liquid assets are assumed to be able to protect themselves. The unintended consequence is that the investments that generate the highest returns, like hedge funds, are available only to the rich.

[2] Consulting is where product companies go to die. IBM is the most famous example. So starting as a consulting company is like starting out in the grave and trying to work your way up into the world of the living.

[3] If «near you» doesn’t mean the Bay Area, Boston, or Seattle, consider moving. It’s not a coincidence you haven’t heard of many startups from Philadelphia.

[4] Investors are often compared to sheep. And they are like sheep, but that’s a rational response to their situation. Sheep act the way they do for a reason. If all the other sheep head for a certain field, it’s probably good grazing. And when a wolf appears, is he going to eat a sheep in the middle of the flock, or one near the edge?

[5] This was partly confidence, and partly simple ignorance. We didn’t know ourselves which VC firms were the impressive ones. We thought software was all that mattered. But that turned out to be the right direction to be naive in: it’s much better to overestimate than underestimate the importance of making a good product.

[6] I’ve omitted one source: government grants. I don’t think these are even worth thinking about for the average startup. Governments may mean well when they set up grant programs to encourage startups, but what they give with one hand they take away with the other: the process of applying is inevitably so arduous, and the restrictions on what you can do with the money so burdensome, that it would be easier to take a job to get the money.

You should be especially suspicious of grants whose purpose is some kind of social engineering– e.g. to encourage more startups to be started in Mississippi. Free money to start a startup in a place where few succeed is hardly free.

Some government agencies run venture funding groups, which make investments rather than giving grants. For example, the CIA runs a venture fund called In-Q-Tel that is modelled on private sector funds and apparently generates good returns. They would probably be worth approaching—if you don’t mind taking money from the CIA.

[7] Options have largely been replaced with restricted stock, which amounts to the same thing. Instead of earning the right to buy stock, the employee gets the stock up front, and earns the right not to have to give it back. The shares set aside for this purpose are still called the «option pool.»

[8] First-rate technical people do not generally hire themselves out to do due diligence for VCs. So the most difficult part for startup founders is often responding politely to the inane questions of the «expert» they send to look you over.

[9] VCs regularly wipe out angels by issuing arbitrary amounts of new stock. They seem to have a standard piece of casuistry for this situation: that the angels are no longer working to help the company, and so don’t deserve to keep their stock. This of course reflects a willful misunderstanding of what investment means; like any investor, the angel is being compensated for risks he took earlier. By a similar logic, one could argue that the VCs should be deprived of their shares when the company goes public.

[10] One new thing the company might encounter is a down round, or a funding round at valuation lower than the previous round. Down rounds are bad news; it is generally the common stock holders who take the hit. Some of the most fearsome provisions in VC deal terms have to do with down rounds—like «full ratchet anti-dilution,» which is as frightening as it sounds.

Founders are tempted to ignore these clauses, because they think the company will either be a big success or a complete bust. VCs know otherwise: it’s not uncommon for startups to have moments of adversity before they ultimately succeed. So it’s worth negotiating anti-dilution provisions, even though you don’t think you need to, and VCs will try to make you feel that you’re being gratuitously troublesome.

Thanks to Sam Altman, Hutch Fishman, Steve Huffman, Jessica Livingston, Sesha Pratap, Stan Reiss, Andy Singleton, Zak Stone, and Aaron Swartz for reading drafts of this.

Samsung focused on SA, Africa growth

Duncan Alfreds

Johannesburg – Africa is a focus market for Samsung as the company looks to tap into an emerging middle class in developing countries.

The South Korean giant electronics company launched the Samsung Galaxy SIII smartphone in Johannesburg on Friday, but hinted that the sought-after device was leading a charge of conquest of developing markets.

«South Africa and the African continent is a massive focus for Samsung – not only from a mobile phone perspective, but also from a holistic perspective,» Craige Fleisher head of mobile communications at Samsung SA told News24.

Global pre-order for the anticipated Galaxy SIII topped nine million and in SA, close to 50 000 have been ordered before the launch, and Samsung said that it was an indicator of the strength of the brand in developing markets.

«We have strong confidence from our partners in South Africa, and it will be very interesting to see how the sales look. We predict significant growth for this product.» said Fleisher.

Stepping stone

The South Korean giant is targeting Africa for future growth and has implemented a strong focus on African for Samsung products and services across consumer, enterprise and industrial sectors.

«We have our Build for Africa programme where specific devices and units, not only on the mobile device front, but across the range, have been specifically built for Africa for Africans,» Fleisher said.

Samsung produces a range of consumer devices and Fleisher said that success in Africa could lead to further penetration into Africa.

«The South African market is a unique market. We are the stepping stone into Africa and it’s a very important market for Samsung and we have invested significantly here,» Fleisher said.

«What Samsung has done is we took cognisance of the fact that the demographic is very different; internet penetration is substantially lower than European countries, so we brought creative, relevant products that speak to the consumers,» Samsung SA managing director Deon Liebenberg told News24.


Cost is an important factor in developing markets, and Liebenberg cited cheaper Samsung devices than its flagship Galaxy SIII which could deliver a smartphone experience for cost-sensitive consumers.

«Very recently we announced a significant product called the Samsung Galaxy Pocket smartphone. This specific phone is very uniquely positioned in the South African and African market because we addressed the specific addressable market: It’s the first Galaxy Samsung product – runs Android, 3 megapixel camera – and we’re retailing that product for under a R1 000.»

The manufacturer will also not discontinue sales of the Galaxy SII, which was named «Best Smartphone» by the GSMA, while at the same time upgrading cheaper models like the Galaxy Ace and Y Pro to retain market share.

Both Liebenberg and Fleisher are former South African Research In Motion executives and are determined to increase Samsung’s share of the local market.

About 65% of the South African smartphone market is taken by BlackBerry devices, due in part to the BlackBerry Internet Service and Samsung is determined that the local market should reflect global trends.

Samsung recently overtook Nokia as the largest global cellphone manufacturer, increasing its market share to 25.4%.

«We want to challenge the local market; we want to challenge the African market – and literally it will democratise access to the internet: Giving access to cost-effective, feature-rich smartphones where people can experience technology and the internet across the continent for the first time,» said Liebenberg.

Africa is a focus market for Samsung

«South Africa and the African continent is a massive focus for Samsung – not only from a mobile phone perspective, but also from a holistic perspective,» Craige Fleisher head of mobile communications at Samsung SA

Top Startup Incubators And Accelerators: Y Combinator Tops With $7.8 Billion In Value

ncubators have become an increasingly important part of the tech startup scene in recent years.

A number of hot startups have emerged from these programs, encouraging more new entrepreneurs to apply. They’ve become so popular that about one accelerator a day launches these days, says David Cohen, head of TechStars. Not only are they popping up in many cities, but also in specific verticals, such as education. These incubators have been called alternatives to MBAs. Emphasizing that concept, Y Combinator now even accepts applicants who don’t even have a startup idea.

These programs provide new entrepreneurs with mentorship, advice and practical training on technical, business and fundraising topics to help them get from idea to product to launch and beyond. They typically take a small piece of equity in exchange for a small amount of cash and entry into the program.

As part of our Midas List coverage this year, FORBES created a list of the top U.S. incubators and accelerators. The rankings (see the chart below) are based on a number of factors, focusing on the value of the incubators’ companies. In other words, we took the exit prices or the last priced equity valuation of the companies that have gone through each program. We also took into account other measures, such as how much venture funding their companies have raised, what percentage of their companies have raised funding and what percentage of their companies have been acquired or gone out of business. (Note: some firms provided us data for the rankings on condition that we not publish it.) The Midas List, which ranks the top 100 venture capitalists in the world, launched Wednesday, May 2.

The top incubator in our analysis is Y Combinator. When taking into account the 172 companies that have been acquired, shut down or raised funding, the total value is $7.78 billion, for an average of $45.2 million per company. It’s a remarkable figure, considering the Mountain View, Calif.-based firm has been in existence for seven years. The data is of course skewed by certain large companies. Y Combinator did not identify individual companies’ valuations in data that they provided, but Dropbox and Airbnb are very large. Still, even if you remove the two, the firm still has a strong hit ratio and number of absolute hits. Some of its biggest exits include: 280 North, Heroku, OMGPOP, Loopt, Cloudkick, Zecter, Wufoo and Reddit. For comparison, last June, Y Combinator said its top 21 companies were worth $4.7 billion.

Rank Incubator/
City Note
1 Y Combinator Mountain View, Calif. Dropbox and Airbnb are just the biggest names in portfolio. Investors fight to invest in YC companies at sky-high prices. Founded in 2005.
2 TechStars Boulder, Boston, New York, Seattle, San Antonio Founded in 2007, it has grown to five cities, but keeps batches small to give each startup extra attention. Has broader impact by helping other incubators.
3 DreamIt Ventures Philadelphia, New York, Israel Founded in 2008, it has programs in Philadelphia, New York and Israel, with 65 portfolio companies, including SCVNGR/Level Up.
4 AngelPad San Francisco Founded by seven ex-Googlers in 2010; hot portfolio, but too early to value many of the companies.
5 Launchpad LA Los Angeles Founded in 2009, 23 companies have gone through program, 19 have been funded, 5 acquired.
6 Excelerate Labs Chicago Founded in 2010, the firm has graduated 20 companies so far. Mentors include localGroupon investor Brad Keywell.
7 Kicklabs San Francisco Stage-agnostic accelerator focuses on helping startups close first deals with large brands and agencies.
8 500 Startups Mountain View, Calif. Founded in 2010. Also has seed fund in addition to incubator. Focus on startups from overseas as well as US.
9 TechNexus Chicago Doesn’t have time limits on companies it accepts. Invests in its companies on case-by-case basis. Founded in 2007.
10 Tech Wildcatters Dallas New incubator, but has some promising startups
Others considered: The Brandery, Capital Factory, ERA Accelerator,
LaunchBox Digital, NYC Seed Start

Y Combinator has a natural perhaps unfair advantage over others because it has been around longer than many others. Therefore, its companies have had more time to grow. Y Combinator has also been popular among investors, judging by the types of deals that are getting done for its companies. For its most recent batch of companies that pitched to investors in March, a select few startups were trying to raise convertible notes at caps of $10 million, $12 million or even $15 million.

Y Combinator established itself by bringing in talented technical founders and encouraging them to build a startup and launch it in three months. (Some already have a product built before starting.) The best way to find out if a product will work is to launch it, Y Combinator Cofounder Paul Graham tells his entrepreneurs. Y Combinator has since expanded, to seven partners.

Sequoia Capital invested in Y Combinator’s funds, and later, Yuri Milner, Ron Conway and Andreessen Horowitz provided $150,000 in guaranteed funding to each startup. The biggest value of the program now, though, may not be the programs, advising or even introductions the firm makes. It’s the network. Y Combinator now has hundreds of founders in its tight network who are known to go to bat for other Y Combinator companies.

The other top firm in our ranking is TechStars. Founded in 2007, the firm is Boulder, Colorado-based, but has expanded nationally, in a kind of franchise model to New York, Seattle, Boston and San Antonio, Texas. A total of 114 companies have gone through the program, and 98 are still active. Of those, 73 are receiving funding and have raised $134 million total in venture capital at last count. The companies have 714 total employees. TechStars is also very popular, with only 1% of 4,000 applications each year to all locations being accepted. About 80% of TechStars companies go on to raise venture capital or a significant angel funding round. Companies have raised an average of $1.1 million upon finishing the program, across all the TechStars locations. About 40% of startups come from areas near the city of each program. TechStars founder David Cohen has hired directors at each of the other locations to run the programs.

“The venture community has started to see high quality accelerators as a filtering mechanism,” Cohen says. “It’s become a new college for entrepreneurs because we’re so selective on front end.”

TechStars’ model is to bring in mentors to help its startups, and has a 10-to-1 mentor to startup ratio to make sure each company gets focused, deep attention from several mentors. TechStars has also tried to disseminate information about its model to others, by creating a “Global Accelerator Network” in partnership with Startup America. By open-sourcing its model, TechStars has helped launch other accelerators. Cohen has also emphasized transparency among incubators. He has published a list of all the companies that have gone through TechStars, including how much funding they’ve raised, and how many employees they have. He’s encouraging others to do the same, so that entrepreneurs can make informed decisions about which program to attend.

“There should be transparency so that you can look at the data and make an informed decision [based on] who was funded and the amount and the success rate,” Cohen says.

TechStars is different because it keeps its incubator batches small and tries to give ample amount of attention to each of its startups, Cohen says. In its last batch in summer 2011, TechStars Boulder had 12 companies. It generally only holds one session per year, whereas others have two sessions. “For us we focus on quality over quantity,” Cohen says. “We want all companies we fund to be successful. We’ve kept our class sizes small.” TechStars also differs from some others in that Cohen also invests in startups, having recently closed a $28 million second fund. Companies that have gone through the program include SendGrid, Occipital, Orbotix, CrowdTwist and OnSwipe.

DreamIt Ventures, founded in 2008, has had 65 companies go through its program. DreamIt has expanded from Philadelphia and now offers a program in New York and one in Israel. DreamIt’s most well-known company is SCVNGR, which last year raised $15 million at a $100 million valuation, according to TechCrunch. DreamIt also recently launched a year-long program for minorities called DreamIt Access backed by Comcast Ventures, which plans to fund 15 companies.

AngelPad was founded by seven former Google executives in 2010. The San Francisco firm’s founders include Thomas Korte and a number of other specialists. AngelPad has had a competitive advantage grabbing former Googlers who start companies. But it doesn’t limit its focus to them. The program differentiates by keeping its program small, with no more than 15 startups per batch, which provides for personalized mentoring. AngelPad also emphasizes product development. Also provided is office space, where companies work but also help each other out. Many of AngelPad’s startups are still fairly new, but there are a number that have already raised venture rounds.

LaunchPad LA, founded in 2009 by GRP Partners’ Mark Suster, has had 23 companies go through the program. Of that group, 19 have raised funding, 10 of which were “significant VC funding.” And five have been acquired, two of them for more than $30 million. Recently, LaunPad LA-backed Sometrics was acquired for a reported $30 million by American Express. Others such as GumGum, MovieClips and GameSalad have raised significant funding. Los Angeles may not be as well known as a tech hub as Silicon Valley, but there is substantial talent and startups in the area and new players such as Science.

Excelerate Labs was founded by Sam Yagan, who sold OkCupid to IAC for $50 million in 2011 and Troy Henikoff, who sold SurePayroll for $115 million in 2011. Founded in 2010, the Chicago-based firm, which operates an annual summer program, has graduated 20 companies so far. Excelerate has brought in a slate of mentors including Groupon investor Brad Keywell. In addition to the $25,000 that each startup gets in exchange for 6% in common stock, local venture firm New World Ventures has committed $50,000 to each Excelerate company. The firm has moved into a new space at 1871, a new digital startup center.

Stage-agnostic accelerator Kicklabs focuses on helping its startups close their first deals with large brands and agencies. That’s often the hardest part for startups, says Chris Redlitz, head of the San Francisco firm. Kicklabs has a pool of 27 brands it works with to connect to startups. It doesn’t compete with Y Combinator, TechStars or other incubators, Redlitz says, because it seeks to help startups after they’ve finished other programs.

Note on the rankings: FORBES is using value of incubators’ companies as a measure for the rankings. Still, some may argue that even though other incubators haven’t created billion-dollar companies as Y Combinator has, other incubators may be more helpful for certain entrepreneurs. We used value of companies as a basic metric with the logic that entrepreneurs would want to be at the place where the highest valued companies are created. Still, entrepreneurs can determine which would ones be the best for their own particular interests and circumstances. Also, there are many relatively new incubators that we considered but didn’t include on this list because there wasn’t enough data to evaluate them.

The Art of Raising Seed: You’re Either Hot, Or You Make Your Own Heat

Editor’s note: This post is written by guest author Darius “Bubs” Monsef, who is founder & CEO of the new design marketplaceCreativeMarket. He is also the founder of the popular creative community COLOURlovers and is a mentor with 500Startups & PIEPDX. Bubs blogs at HelloBubs.

I’d started raising 3 rounds. One fell apart and the others raised $1M & $1.3M in a few weeks each. The startup game is a marathon and while I’m not yet qualified to give advice about crossing the finish line, I feel like I know a lot about the first 5 miles… It’s from that perspective I give the following advice to fellow founders who are looking to raise their seed rounds.

I learned a ton when the first round fell apart. We didn’t need it, which is why it fell apart… but the interactions & lessons learned were invaluable in us later successfully raising two rounds. When we set out to do our first, we had just completed YC and were bootstrap profitable. We had some ideas of where to take the business, but they were largely influenced by what we thought investors would want to hear. That didn’t sit well with us and made my pitch less impassioned. And we weren’t sure we wanted to raise… So I took meetings and got some interest from investors, but those meetings were scattered over the course of a few weeks. (We were dealing with an acquisition offer at the same time, so my full energy wasn’t in raising.)

As weeks went on, investors that were interested and had given us verbal commitments started taking longer to respond to emails and some were never heard from again. You could feel things going cold. After we closed that big partnership deal, I proactively shut down the round. I reached back out to investors to tell them we had some capital to take us further down the road and that we would circle back later on. I wanted to shut it down from a position of strength instead of letting it fizzle out.

There’s a lot more to say, though.

Below are the lessons I’ve learned. I hope they help you raise your rounds.

Manufacturing Heat

Let me first be very clear: This isn’t about lying or being dishonest. It’s about preparing yourself and your strategy for a key time in your startup’s life. The same way you should optimize a landing page for conversions, you should optimize your pitching for conversions.

It’s a lot like dating. Attraction matters. And you can’t just Photoshop your photo for your seed round. You’re going to have to meet people in person, so make sure the person you present in your deck is the person you are… the best version of who you are.

I heard advice once from a fellow founder that agreed that manufacturing heat is important, but he took it further and said something to the effect of… “Take meetings just to cancel them.” That kind of move can work for some people, but that’s not how I roll and in my opinion you don’t want to start any kind of relationship by being dishonest. If you can’t raise your round without lying & trickery, then maybe you should reevaluate what you’re trying to do.

Some founders are lucky to bathe in the light of hype. They raise big rounds fast. The rest of us, however, have to really work at it.

When my company is in fundraising mode I’m dedicated to that 100% of the time. My team knows I’m not on product or other biz dev tasks. For a solo-founder company or one where the person pitching investors is also the sole developer, this can be a big drag. But you can’t half-ass making heat and without the heat you probably won’t raise your round.

One Does Not Simply Walk Into Fundraising

The moment you tell anybody you’re raising a round, the clock starts ticking.

The longer it takes you to close your round, the less likely it will actually happen. If you’re hot you should be able to get interest and close a round pretty quickly. If you’re still dragging ass two months in, things can get cold and often freeze up.

An honestly packed schedule forces you to be busy and appears less desperate. “I can talk to you anytime this week” sounds like nobody else is interested. “I can talk to you at 1pm on Wed or 3pm on Thurs” sounds like your schedule is full (and it really should be). “My schedule is pretty full, but I really want to connect and will move things around” is your first line if the meeting is really important.

So, don’t say you’re raising until you’re really ready. Here’s how you’ll know:

– You have an early commitment.

– You have your list of 30-50 investors in a spreadsheet ready to work.

– You have intro requests queued up from 3-5 people for each investor you don’t know.

– You have your calendar cleared for the next 4 weeks of intensive fundraising.

Now go.

How to Raise Before You Raise

It might not make sense to have an early commitment before you start raising, but it’s hugely helpful. Flex your networks and figure out what investors you have the best relationships with. If you don’t, then start working on it now. And don’t stop.

Months before we started raising our first successful round I thought a lot about who we could get in early and how we’d round it out. I’d met Dave McClure a few times and thought he and his newly created 500Startups would be a good fit. So I reached out to offer my help as a mentor in design & community for 500Startups. And for a couple months I added value and got to know him. I also knew Alexis Ohanian and had talked to him a few times about our personal alignment around our philanthropic work.

Then when I knew we were getting ready to raise, I approached Dave and Alexis about being in our round. Remember to get verbal commitments for the round before you start.

Let’s be clear, not everyone may be able to get a verbal commit before they actually start publicly raising and in that scenario, what you should do is front-load your calendar with the meetings that will most likely convert. Start with the investors who most understand your product and market fit. Or the investors that are capable of making split decisions (i.e., Angels, not VCs.) and those you have the strongest ties to.

If you’re lucky enough to have family or friends or anyone willing to invest early on, it’s super helpful in being able to approach early investors and tell them “we just started taking meetings about our round and already have $50-100k committed.”

Matching the Right Patterns

Investors, especially the great ones have what’s called ‘deal flow’. They’ve see a ton of deals. In order to be able to get through checking out every opportunity, they look for patterns. They look for things they’ve seen in other successful companies… Harvard, MIT, Stanford educations… Google, Apple, Facebook former employee… up and to the right graphs…

Every abnormality from these patterns, though, is a negative mark for you.

But, this doesn’t mean your deal is dead, it just means you need to position yourself where your strengths are. If you have the pedigree, put it out front; if you don’t but have traction, put that out front.

I went out to raise a seed round for a color website… at a time when game mechanics & social analytics were all the rage. There is now a design renaissance that makes us more appealing as a pattern match because of the success of both Pinterest and Fab.

I didn’t graduate from a great school with a CS degree… I didn’t graduate at all. None of our founders have a CS degree. (We’re all self-taught.) In fact, I was recruited by Microsoft and went through YC, so that’s what helps qualify us to investors. But what we have to show for our team is a track record of building great product and growing passionate communities. So… My team bio slide is not first in our deck.

This is:

How Much to Raise

I’ve talked to lots of entrepreneurs that think they want to raise $200k or $300k. But these are abnormal amounts for legit seed rounds. Again, when hot startups are all raising seed rounds of $750k-$1.5M and you say you’re raising $200k, it’s not a good look. Investors don’t hear “we’re smart & capital efficient” they hear “this is a small idea and we don’t need much money because their isn’t a big opportunity to go after.”

So, set a realistic target round size and then try and get oversubscribed. You’d rather be in a position where you have more interest in your round than room to fit investors in. This gives you the option of raising more, or being selective about what investors you really think are the best fit for you. For our seed round we set out with a target of $750k and ended up raising a million. We had some great investors that we wanted to fit in, and the difference between raising the extra $250k was only a couple points of equity.

Again, this isn’t about being tricky and or dishonest. I know a lot of investors that are pretty annoyed at how much founders are pushing the whole oversubscribed thing. For any investor who takes the time to get interested in you and evaluate your deal… to get pushed out because you were just talking to them to inflate interest is a pretty shitty move.

Shoot for a reasonable target, and if you’re not able to get enough interest to close the higher amount, at least you’ve set an amount you know you can close. If you went out to close a $1M round and got stalled out around $800k, it can be a painful road to get that last $200k. At that point you’re not hot. You’re desperate to close and that sends all the wrong signals.

Also, make sure you really are raising enough. Push for explosive growth, but assume a slow rise. “Seeing seed funded startups that raise less than $750K have a very high rate of mortality. Not sure if its correlated or causative.” @georgezachary

Advisors & Investors

Be careful about your advisors. People often like to have big amazing advisory boards… but if any of your advisors are also investors (who aren’t investing in you) it sends up a big red flag. Paul Graham once told me that an advisor is an investor that doesn’t believe in you enough to put cash in. To be fair this isn’t true of all advisors. I advise a couple startups about early stage design & community building stuff… but I’m not investing right now, so there is no conflict. When you have a known investor as an advisor but who doesn’t have some skin in it, other investors are going to take that as a bad sign.

So either get your advisors to invest some cash or don’t count them as an advisor.

When You’re Raising… Rainbows & Cupcakes.

One thing that bothers me about Silicon Valley is how people talk about how they’re doing. Even in friendly conversations rarely do people say anything negative… even when things are on flames and 10 feet from crashing into the ground. This is because the startup world is small. Way smaller than you think. I try to be a pretty direct and honest person, when things are bumpy I’ll tell you about it. I’m confident about what we’re doing and humble enough to ask for help when I think people are smarter than me. But this has come back to bite me in the ass more than once.

When we were first out of YC talking to investors, a prominent investor who was friendly with us suggested we talk to one of his buddies who also ran a thriving community site. So we met this other founder for beers and what I thought was just hanging out. We talked about our startups, ideas, random thoughts about opportunities, etc. It was just a few founders out for drinks and shooting the shit. But it really wasn’t. What was communicated back to that investor was that we didn’t know what we were doing. That we had a scattering of ideas and weren’t confident. And that investor, although he had verbally committed to be in our round backed out. Causing the round to fall apart.

In a world where everybody says things like “awesome, dude. growth is amazing and the team is killer.” It’s not a good look when you say something less confident and that apparent lack of confidence is often the only thing that is heard.

So when you’re raising, and sometimes you’re always raising. Be careful about what you say and to who. This world is small and everybody knows everybody else. Just assume whatever you say is going to get to the ear of an investor.

Not sure I need to point this out again, but this isn’t about lying. Just find a way to see and talk about what’s in your glass… even if it isn’t half full and closer to only a drop left in it.

Convertible Note Or Series Seed

I don’t have a strong opinion on this. Both rounds I’ve raised were done as notes, but I would have been fine doing series seed docs. As a founder with hundreds of things on my brain, the conversion details of the note are just one more thing to have knocking around versus the clear cap table of a series seed round. I think you can also have series seed docs that are just as friendly to founders as notes but notes can be cheaper and quicker to get done.

The Pitch Deck Is The New Business Plan

Pitch decks are almost required for raising a round, but they don’t have to be a required part of your pitch. I’m good in conversation and presenting to small groups, so I’d prefer to have a conversation as opposed to doing the pitch dance. The risk in presenting your deck is that your pitch has to be perfect for any investor. You can say one word about your market that can derail the whole rest of your conversation and it’s hard to course correct when it’s written right there in your slide. During my first round I started getting my laptop set-up to pitch an investor but by the end, my laptop stayed in my bag until I needed to demo something. My pitch deck was really only sent out as a reference tool for partners.

There is also caution in letting your deck speak for you. Even if you’re the best slide crafter in the universe, it’s hard to get 10 slides to be more passionate, inspiring and intelligent than you are. So don’t send your deck out with your cold emails. I only send it out after I’ve spoken to somebody, or if a lead is already really hot and just needs some reference points. My decks are also purposefully not great without me there to weave the story. They’re just a few words on a slide, or a graph, or a picture. I don’t want my deck to tell my story. I want to tell it in my voice.

But if you’re a bit shy or don’t freestyle conversation that well, using a deck to help you tell your story is fine. Like with all founder advice use what works well for you, and don’t worry about the rest.

Exactly How I Made Our Seed Hot

We got early verbal commits from well known and respected investors BEFORE we started raising. (Don’t tell Dave McClure I said he was respectable. That would ruin his image.) We agreed to terms with Dave and then went out to raise.

(Note about terms. The valuations that companies are raising right now are pretty crazy. If you’re lucky to be a YC company your valuation can be close to $10M. For a brand new idea this seems a bit nuts to me… but hey, if you can get it, good for you. We had an established site, millions of users and we raised our first round at a $5M cap. Although we could have raised at a higher valuation, we prioritized investors over a higher cap. The dilution wasn’t substantially different but we ended up with the investors we wanted to and not just the ones who would accept different terms. Do your own math and figure out what’s right for you.)

With our terms set, we put our profile up on and they blasted us out to a thousand investors. Because of our advisors & early commitments, we got 25 inbound requested intros and that interest created heat. Enough heat to push our inbound intros to about 65 in the first week or so. (An record at the time.) Then I packed 60 meetings into the next couple weeks. Often with 8+ a day. I’m not a bullshitter and I hate sales-y jargon and when a potential investor was giving me grief or not understanding the opportunity, I simply said, “No worries, I appreciate your time” and quickly removed them from my target list. When you have 50 other meetings to take, you can rebound immediately from a crap meeting. When you only have 3 scheduled and take a downer… it’s hard to get back up.

From those 65+ intros we ended up closing a round with about 10 investors. Some large VCs, some growing syndicates and some small angel founders that I respect a lot.

Leverage the Tools You Have

I’ve technically tried to raise four rounds but I really can’t count the first. It was 5 years ago before I knew anything about startups. I lobbed a couple cold emails into top tier VCs and hoped to talked to them. They didn’t get back to me.

Nowadays there are amazing resources like (who I credit with largely helping us raise our first round) and CrunchBase (where I go to see who’s invested in who when compiling my target lists).

I’m just one of hundreds of founders who’ve raised a round but feel free to ask for help. Need help putting your deck together? Want an intro to an investor? Want advice about terms / round size? Ask us. We’re busy, but I think most of us are willing to carve out a bit of time to help a fellow founder getting started.

All the best. Build great companies and change the world. Let me know if I can help you.

Login with Facebook to see what your friends are readingEnable Social Readingi Mobile Strategy A Big Weakness For Small Businesses: Survey Says

Small businesses are starting to recognize the importance of mobile marketing and m-commerce, but they still have a long way to go. According to the Small Business Mobile report, more than 61 percent of small businesses have no mobile search strategy.

Top Mobile Trens 2011

This multimedia presentation co-authored by KPCB partners Matt Murphy andMary Meeker outlines and analyzes the top 10 trends defining the current worldwide mobile Internet industry. A compelling blend of market data and meaningful insights, the presentation takes a close look at the dramatic shifts and powerful factors changing the face of mobile computing as platforms like the iPhone and Android hit critical mass. Matt and Mary pinpoint today’s most influential trends, from the phenomenal ramp-up of social networking, to the huge promise of mobile advertising, to the revolution in mobile commerce. This in-depth resource also includes a set of trend-watching tips for what the authors agree will be a fascinating decade ahead. View the full presentation to gain a deeper understanding of the impact of key trends on the mobile investing space.

Mind The Mobile Monetization Gap

This report talks about today’s Internet growth and provides an in-depth look for the following new trends: 1) review of Internet stats and notes that Internet growth remains robust and rapid mobile adoption is still in early stages; 2) run through a number of examples of business models that are being re-imagined and re-invented thanks to mobile and social; 3) highlight mixed economic trends and 4) observe that while there’s a lot to be excited about in technology, there are things to be worried about regarding America’s financial situation.

KPCB Internet Trends 2012

2012 Invention Awards: Augmented-Reality Contact Lenses

After two decades as an electrical engineer, Randy Sprague quit his job in 2008 to start a solar power company. He had been planning the venture for years, saving up, getting his wife’s blessing. But then one morning while taking a shower, he had a brainstorm for an entirely different idea: contact lenses that could act as part of a wearable display. Users could instantly augment their view with information—say, the price of an antique in a store or the species of a tree in the forest—or transform their field of vision into a virtual videogame screen. Suddenly the solar company no longer seemed as appealing.

Sprague had designed wearable displays used by the military at his old job but found it difficult to produce a lightweight one with a wide field of view. What he realized in the shower was that he could sidestep those problems by moving the screen to a pair of glasses and adding an image filter right on the user’s eye. To develop the invention, he founded a company he named Innovega. Within 18 months, he had received a National Science Foundation grant.

In Sprague’s current prototype, called iOptik, two small projectors mounted on each arm of a pair of eyeglasses cast an image on the inside surface of polycarbonate lenses. Two sets of nanofilters made from minuscule wires embedded in each contact lens permit different light sources to enter the user’s eye. The outer filter lets through unpolarized light from the outside world. The inner filter lets in only light from the projectors, by blocking out light of different wavelengths. This allows the user to see the display image and the outside world simultaneously. Users will also be able to switch from the see-through mode to a totally occluded mode so they can play a videogame or watch a 3-D movie with a 120-degree field of vision.

iOptik is not alone in the burgeoning field of augmented-reality devices. Other companies, including Google, have AR systems in development, but those displays are far heavier or have a much smaller visual field. Sprague says his invention will be ready for FDA testing by the spring of 2014, and he is currently in talks with electronics companies interested in licensing it. Innovega recently received funding from Darpa, the Pentagon’s R&D arm, which plans to use iOptik as part of a project aimed at equipping troops with “super vision.” Using iOptik lenses, soldiers could, for example, call up an overhead map of a battlefield while at the same time seeing the real thing right in front of them.

Inventor: Randy Sprague
Invention: iOptik
Cost: Undisclosed
Distance to Market: short ● ● ● long


Each iOptik contact lens has two embedded nanofilters. An outer filter lets in light from the outside world; an inner filter lets in images from projectors mounted on the arms of a pair of glasses. The combination gives the user an augmented-reality view.

2012 Invention Awards: Augmented-Reality Contact Lenses

Top 10 Business Predictions for 2012

December truly is the most wonderful time of the year for small business owners. Besides the spurt in shopping activity, it’s the time when business pundits provide predictions for next year’s trends.

I’m feeling pretty good about my track record in picking winners — you can check out my 2011 predictions post. OK, maybe most businesses didn’t splurge on IT this year, but there were definitely more IPOs, QR codes gained in popularity, and cloud-based software and services were huge.

What changes in the business climate are just over the horizon as 2011 winds down? The overall economy is expected to grow just 2 percent, but your local mileage may vary. I’ve sifted through stacks of forecaster pronouncements to find the best bets.

Here are my favorite predictions for 2012:

  1. Volatility ahead. With Europe now teetering, economic uncertainty will remain the big issue for every small business owner, with 44 percent of owners naming it the «one thing that stands between where you are today and growing your company,» a Guardian Life Small Business Research Institute study found. Winners will have flexible long- and short-term plans so they can shift gears quickly.
  2. «Right-time» multichannel marketing. Watch for new tools that will help business owners better analyze complex customer behavior and comments on various social-media platforms. Then, you’ll use that data to monetize your business’s social-media presence with tailored marketing campaigns that reach the right customer at the right time with the right message, opines Joe Cordo on the MarketingProfs blog.
  3. More cheap online ads. Marketing will center around a move to low-cost online tactics such as paid search, says Kenneth Wisnefski, founder/CEO of the SEO firm WebiMax. «Merchants and retailers who chose innovative and less-expensive advertising channels including social media and paid search were rewarded well during the Thanksgiving weekend,» he says in reference to the spike in online sales.
  4. Customers in charge. More businesses will involve customers directly in merchandise and marketing decisions, Susan Reda writes in STORES magazine. How? Here’s a hint: If you aren’t doing online customer polls yet: Facebook makes those insanely easy to set up.
  5. Mobile purchasing grows. «Those retailers not optimizing their website for mobile phones need to start as soon as possible,» says Diane Buzzeo, CEO of ecommerce-software provider Ability Commerce. Research firm eMarketer adds that m-commerce more than doubled this year to $6.7 billion, and expects it to quadruple again by 2015.
  6. Credit gets easier. Business owners may finally get the capital they need, says Odysseas Papadimitriou, CEO of the credit-card portal CardHub. Underwriting standards relaxed this year and will continue to loosen up in 2012, he says.
  7. Services head offshore. Service-sector businesses will be in demand overseas, Elance forecasts. This year, U.S.-based contractors exported their services to more than 140 countries through Elance’s freelance portal.
  8. Daily deals die down. Experts agree: The daily-deal space is oversaturated with competing offers. Also, many business owners lost money doing daily deals. Expect a shakeout, both in the number of deal companies and in the types of deals offered.
  9. Retail-format experimentation picks up. From pop-up stores to smaller-format Wal-Marts to food trucks, expect more retailers and restaurateurs to experiment with their store layouts. As the economy slumbers, retailers will look for ways to make cheaper, smaller footprints work, the Booz & Company’s «2012 Retail Industry Perspective» report says.
  10. More collaboration. This one’s my prediction: the small businesses that stay afloat will be the ones that reach out to complementary businesses in their town or their industry and find ways to help each other.

Top 10 Business Predictions for 2012