The Startup 2.0 Panel was Saturday at 2pm.
The moderator was Ryan Sarver. Participating were (left to right in the photo):
Mike Shean from Skyhook Wireless – wifi location technology company. Ambient wifi GPS. He cofounded – Bain, Intel, Nokia as funders.
Eric Gerritsen from Global Seed Capital – Venture Finaning Company in Boston. Invested in 7 companies which could be called Web 2.0. Generally in the 10k – 250k investment size – early stage.
Basic format was an open panel exchange.
Q. Has the environment changed?
We can now make smaller investments, see if companies have a real concept and have a prototype. Companies get further before they need seed capital – easier to get a prototype together for 200k than it used to be.
Infrastructure, customer acquisition can be quite cheap these days for web based companies.
Hasn’t changed necessarily the kinds of investments we make, but the best way to buidl a company.
Seed investments used to be about funding the opportunity to play out the idea – but you don’t have to do that anymore. Test seeds are now possible – smaller investment, more ability to have something working before you go ask for real money.
Take 200k and try out the concept – when you go to the VC they want to see stuff that is already proven.
MySQL, Linux – enabled us to build things without trying to raise money.
Eric Gerritsen: these times reflect 1994 not 1998. Huge backlog of capital – overhand. The bad news is most of the people here won’t get it – 3 to 7 million series A round type stuff. Awkwardness is too much money sitting at the higher ends
Steve Huffman: We invested less than 100k to get online, and now we’re profitable so it is much easier to not be worried about raising capital. They didn’t buy software at all. Biggest expense is rent in cambridge / somerville.
Q. Whats up with web 2.0 – is it a bubble?
Steve Huffman: We’ve tried very clearly to distance ourselves from all the web 2.0 stuff. We’re a web startup, and we may look like a bunch of other companies, but we stay focused on the content and the service we provide – not get painted as web 2.0.
Nick Beim: Is there a bubble? Yes, there is a little. People are very excited. There will always be bubbles in the investment community – partially that signals the strength of the opportunity. Many people get it wrong (and are lemmings) but those who pick the right companies end up doing well. Question – is it really good for the end user? Is there an organic attraction here. Keep your head. How are companies being built – are they being built to be sold, and quick exit, or is the goal to be long term? Demonstrate a credible long term path – if you set out saying that you will be bought as a feature company, no one will invest – you need to be buyable, but have a credible independent strategy – providing value to users.
Dave Beisel: take a step back and think about what are my goals in starting this? Am I looking to raise lots of money and grow a large company? Am I looking to raise a small amount of money and focus on getting profitable? Am I hoping to develop a unique feature and get acquired? Remember to be reflective and know where you are trying to get.
Eric Gerritsen: if what you are building is in essence a feature – something which needs to be rolled up – you don’t really need capital to do that. It used to be about taking years developing an idea before getting money, now it is all about being very quick.
Dave Beisel- you can’t get cash anymore with just throw ideas at the wall and see what sticks.
Nick Beim: in the absence of traction you might get funding if you have something else – the right leadership team, the right experience – but the bar has been raised in general – you have to have something more than you did in 1999.
Q. What are VCs looking for?
Dave Beisel – no one thing. There are multiple validation points. Someone experienced, something up and being used and bootstrapped (like Reddit). The more validation points you accumulate the more attractive it is for funding. (What’s the market, who are the potential buyers, what’s the revenue model).
Q: What about people who’ve failed before? Many successful entrepreneurs have failed.
Nick Beim: VCs appreciate failure so long as you don’t keep doing it. Failure can be a great experience – but you have to be learning from it. If you don’t seem him to have learned from the experience that may be a barrier, but simply having been involved in somethign which failed doesn’t necessarily disqualify you.
What do we like? has to be a good team – a core of a team with a thoughtful approach to a problem and an awareness of what they need to complete the team. Big market, and defensible. Whats chapter 2 and chapter 3 going to look like? What kind of advantages can I develop that followers can’t pick up easily. One thing we’re really interested in is something that has a dramatic uptick in user adoption by end consumers – when people are really flocking to your site the VCs will listen. Great websites aren’t marketed they are discovered. Example being myspace – lots of folks had done myspace like things before but it somehow got the formula right, and people flocked to it.
Eric Gerritsen: at my level of investing it has to be about the individual – character, ability to come back from issues, crash through barriers, keep getting up and trying again. Indestructable “roachability” factor.
Mike Shean: we started with a different plan. We left eDocs, noticed that large networks were emerging, thought we might be able to stitch it together – either with access points or by going to cable companies. They tried this and the companies wanted nothing to do with it. So they went back to the drawing board and came up with Skyhook. They actually wardrive and map cities in terms of all the access points. This is the raw data they use to determine location information. They took a long time to build their model. The data they had made them defensiblility – patents too, and being first is important.
Steve Huffman: The first question we get is – well, how is this different than Digg, or any of the other 200 out there that are social filtering and user contributed labelling. We keep track of what’s going on, and whose innovating, and who’s following. When we see people copying – suddenly adding tagging because it was cool – we can write them off as they are just going to be a web tool.
Q: What advice would you offer those looking to start a Web business in this environment?
Dave Beisel: Not necessarily the imperative focus on revenue model in detail, but at least some discussion of what it might be in the longer term. You should have some idea or experiment about where the money will come from.
Nick Beim: Build it to be testable (think of it as a scientific experiment); Know what you core value is – what brings your users back, what really drives your traffic; know what makes you defensible (this may be just first mover advantage, network effects, but that may not be enough)
Mike Shean: Persistence. We bootstrapped for 2 years. Stick with it – even if people don’t think it is a good idea you have to be willing to continue
Eric Gerritsen: 1) prototype – get something out there that works and people can try. 2) focus on defining your character- why are you someone they should work with. 3) think about advertising – lots of big money moving from old meda to new media, how are you involved in or affected by that?
Steve Huffman: 1) don’t take money if you don’t need it. 2) Look for the hard problems – the ones the competitors are afraid of. Don’t be a sheep. If you find yourself copying, stop.
Q: What challenges are most important for companies in this environment?
Eric Gerritsen: There are a lot of smart people; they’re aren’t a lot of extraordinary people. Great companies are the shadows of great people.
Scale. Not just the infrastructure costs but the people – it is hard to find the right folks to join the team.