Start-up Life Update

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==Update Posted 6/22==

Hey FWF,

I posted a few months ago that I was going to quit my corporate job and pursue a startup. There was some interest in me posting periodic updates on startup life.

I ended up moving down to San Francisco in late October to work on the startup. My co-founders and I just received seed funding from a startup accelerator a couple weeks ago. While this in no way means we'll be successful (the odds are still very much stacked against us) it was a great validation of the direction we were moving towards as a company. It also provided me with some personal validation with respect to my decision to leave my corporate job. Even with the seed money, we're still not taking any salary and rolling it all into business costs which are mainly server costs as we're still working out of one of our apartments. We all have enough personal runway to last a while.

The process for getting seed funding happened very quickly. We created our prototype in 3 weeks and presented it to the investors who grilled us on our vision and direction. They liked what we pitched and we got a phone call the next day saying they'd like to fund us.

The funding process for startups is broken up into a few main rounds: seed/angel, series A, series B, etc…

At the seed and angel stage, startups are typically looking for <$1MM in funding and is usually taken within the first 6 months to a year of the startup's life. From the investors' perspective, they know there's a huge failure rate for startups at this stage. What they are looking for are startups with high betas. They don't particularly care about companies with limited growth potential but would otherwise be a profitable enterprise. They really want to catch the next Facebook, AirBnb or Dropbox. For better or for worse, this mentality permeates the Valley.

That being said, if you're looking to do a tech startup there's no other place to be. All other things being equal, a startup in the Valley will do better than a startup elsewhere simply because there's a huge pool of technical talent and investors here. Every week there's at least one startup party or networking event which leads to meetings and coffee with potential investors. At the very least you meet a bunch of very smart and very interesting people.

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Thanks, SS. Really interesting info, even (or especially) for an outsider to this world like me.

I wish you continued lu... (more)

dbond79 (Jun. 23, 2012 @ 6:55p) |

dbond79, most of it goes to Amazon EC2 and then to the gray hairs the VCs make you hire for parental supervision (and fu... (more)

Venturion (Jun. 23, 2012 @ 11:30p) |

Oh, I dunno... Lots of startups in Austin, Texas. Lots of investors also.
Salaries, which are spiking this year are lowe... (more)

dcg9381 (Jun. 24, 2012 @ 8:42a) |

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What are the terms like concerning investor returns?

BADADVICE said:   What are the terms like concerning investor returns?

NDA

Glad that it has worked out for you so far. Keep up the good work. I tried to do the start up with two partners in LA, but unfortunately it didn't go as far as you did.

How did you meet your co-founders?

Thanks for the post and good luck with your endeavor. A quick question: after the seed/angel stage, how much of your company do your investors "own" for a few hundred thousand? I realize that this probably varies quite a but, but is it closer to 10% or 90%?

Is this one of those startup school groups? Like Techstars or something? If it's tech stars, I just met Brad Feld a week ago in Vegas actually.

In general, good luck with it. Few comments on beta though...

1) Beta is a measure of volatility against the market index. High beta means it moves more than the market moves and low beta means it moves less than the market moves. A beta of 1 is right in line with the stock market.

2) As a stock price falls relative to the market, the beta increases. Modern portfolio theory calls this inherently a riskier stock every time it moves down relative to the market.

3) What is the reality though? As the stock price falls, it becomes cheaper and so it costs less to acquire something. Does a lower price increase or decrease your risk? Beta says it increases, while basic and simple thought and business-like minded folks would say it's less risky.

Beta is therefore not a measure of real investment risk, only a measure of the market's historical movement. (backward looking)

Because it is a backward looking measure, it says nothing about future movements either. What was low beta (think many bank stocks) could turn into very high beta stocks on a large drop (again, large banks post subprime collapse).

Nice job getting funded, it says a lot about what you're doing. Is it a pure software play or something else?

jkimcpa said:   BADADVICE said:   What are the terms like concerning investor returns?

NDA

1) The sale of stock he's into says nothing about what's expected... sometimes there's a small dividend that accrues, something like 10%, but that's really a minor point for them.
2) In general, a Venture Capitalist wants to see a 10x return within probably a 5-7 year time frame, because their funds are 7-10 years long. VC's come a bit later into the game than seed funding though, and so seed funds are probably looking for a 30-40x return.

I'm not 100% convinced by the seed funding business model yet... there's too many companies to really keep track of any 1 of them, and I'd like to see a management team that has their own skin in the game, not only in terms of cash, but also a portion of their life in terms of time before I would invest.

In any case, good luck and I wish you the best. Startups can be a ton of fun...


Are you a developer? What's your role going to be?

BADADVICE said:   What are the terms like concerning investor returns?
Usually at the early rounds of funding it's only for a straight equity stake. I was surprised how little protection there was for investors at this stage. For example, if a large company wanted to buy a startup, there's no stopping the founders from simply shutting down the business and then subsequently "hired" by the large company for a healthy sum of money. This effectively screws over the investors. But the longer I'm down here the more I realize that the community is very small; so if you get a bad reputation, you'll pretty much never get funding ever again.

wiggy44k said:   How did you meet your co-founders?

I've been good friends with one of the founders since I was a freshman in college and met the second founder through him about a year ago. All three of us went to the same university. They were both working in San Francisco for a few years before we decided to start this. After flying down several times to see that we could work together well we finally decided to take the plunge.

ankit said:   Thanks for the post and good luck with your endeavor. A quick question: after the seed/angel stage, how much of your company do your investors "own" for a few hundred thousand? I realize that this probably varies quite a but, but is it closer to 10% or 90%?

Thanks! Seed and angel money usually only takes a small percentage of equity. So it's closer to 10% than 90%. It's not healthy for the founders to be so diluted at an early stage, this means they have much less skin in the game.

How did you initially contact the potential investors? This seems like the hard part.

Very cool stuff. Good luck with this and keep us updated if you can.

Love the updates and I do remember your old post. I wish everyone updated their posts as you did as it really adds value to the FW community as a whole.

Good luck with the start-up. Wishing that it grows and prospers.

I started my career working for small start-ups in a capacity of a salaried employee. The kinda kick and satisfaction you get working for a startup is no match to others.

Hopefully, someday I dream and dare to form a start-up.

Good luck!!!

Al3xK said:   How did you initially contact the potential investors? This seems like the hard part.
Some of these tech seed funds, you can just apply to them. They literally have "graduating classes" and everything like that.

It's a great idea in general, although sometimes I feel that they focus too much on just software plays. That's the popular thing to do, so I'm instinctively looking around for investors who branch out a little bit more.

When Henry Ford was launching his company, there were countless numbers of car manufacturers, but Ford is one of the hundreds that succeeded. Odds are that if you invested in one, it folded up and you got nothing back. I prefer to be investing in places or in technologies that others aren't, almost doing what's unpopular because you see value that others are overlooking.

I could be 100% wrong on this, it's just my general impression.

Al3xK said:   How did you initially contact the potential investors? This seems like the hard part.
It's very viral here. You go to one networking event or tech talk and meet a few more contacts who each invite you to a few more events. Just to give you one example, a few weeks back, I saw a free dinner posted on Grubwithus hosted by a local design firm. The goal of the dinner was to meet tech entrepreneurs in the area. I just so happened to sit next to a VC and chatted with him the rest of the dinner. It turns out his firm invests in our industry so we scheduled a meeting with him the following week.

There are tons of industry-specific interest groups on Meetup that hold gatherings on a regular basis. There's also tons of incubator programs that you can just apply to online:

These are just a few of them; there are tons more out there that I don't know of.

Once you are in the Valley, meeting potential investors is easy.

Also, if you're at all interested in learning more about start-ups in general. I'd recommend attending Y Combinator's Startup School. It's a day-long event where they invite a series of speakers to talk about start-up life. You have to apply online to go, but if you're accepted, it's free. I was fortunate enough to go this year. They had a great lineup of speakers including Mark Zuckerberg.

Great going op. Nice job getting the seed funding. I've done my share of start-ups. One never got off the ground due to lack of funding, one went IPO and one got bought out prior to IPO. I've also worked for small public companies that grew to a large company and one got bought out by a fortune 500 company. They all have their positives and negatives. One lesson I learn in the process is don't be a pig. It's a good idea to start harvesting, i.e. cashing out, when you have the opportunity, at least a small percentage. It seems a lot of the current start-up founders are cashing out early, many times even before the IPO by selling some of their shares to private investors. This should not be allowed since funding is meant for business expansion, not for founders to cash out. I don't have a problem with them selling at IPO or when the stock is publicly traded.

jkimcpa said:   BADADVICE said:   What are the terms like concerning investor returns?

NDA
Term sheets are typically public. Otherwise it is impossible to 2nd road show/pitch day.

congrats OP, I remember your previous post. Did you and/or your friends already have an idea in mind before attempting this or did you just wing it on the fly? How well formed was/is the idea?

EvilCapitalist said:   jkimcpa said:   BADADVICE said:   What are the terms like concerning investor returns?

NDA
Term sheets are typically public. Otherwise it is impossible to 2nd road show/pitch day.

Not typically at angel level. At Series A they want to get all the press so the deal summary usually leaked. I've rarely seen angel term sheets.

jkimcpa said:   Not typically at angel level. At Series A they want to get all the press so the deal summary usually leaked. I've rarely seen angel term sheets.It is far more likely to be something like DreamIt type deal vs. angels.

The tech talent is much greater in the valley but the tech talent knows their worth and demand a premium for it. For instance, take a look at the ycombinator job board which only lists those jobs available that have been ycombinator funded. The startups are giving out equity like candy (as well as salaries/benefit etc. And many are those are VC backed. Usually the situation is that the founders have some, but limited tech experience but they need lead tech people. So that 90% equity left after ycombinator is often split in half right after "school."

seattlesalaries said:   Hey FWF,

I posted a few months ago that I was going to quit my corporate job and pursue a startup. There was some interest in me posting periodic updates on startup life.

I ended up moving down to San Francisco in late October to work on the startup. My co-founders and I just received seed funding from a startup accelerator a couple weeks ago. While this in no way means we'll be successful (the odds are still very much stacked against us) it was a great validation of the direction we were moving towards as a company. It also provided me with some personal validation with respect to my decision to leave my corporate job. Even with the seed money, we're still not taking any salary and rolling it all into business costs which are mainly server costs as we're still working out of one of our apartments. We all have enough personal runway to last a while.

The process for getting seed funding happened very quickly. We created our prototype in 3 weeks and presented it to the investors who grilled us on our vision and direction. They liked what we pitched and we got a phone call the next day saying they'd like to fund us.

The funding process for startups is broken up into a few main rounds: seed/angel, series A, series B, etc…

At the seed and angel stage, startups are typically looking for <$1MM in funding and is usually taken within the first 6 months to a year of the startup's life. From the investors' perspective, they know there's a huge failure rate for startups at this stage. What they are looking for are startups with high betas. They don't particularly care about companies with limited growth potential but would otherwise be a profitable enterprise. They really want to catch the next Facebook, AirBnb or Dropbox. For better or for worse, this mentality permeates the Valley.

That being said, if you're looking to do a tech startup there's no other place to be. All other things being equal, a startup in the Valley will do better than a startup elsewhere simply because there's a huge pool of technical talent and investors here. Every week there's at least one startup party or networking event which leads to meetings and coffee with potential investors. At the very least you meet a bunch of very smart and very interesting people.

EvilCapitalist said:   jkimcpa said:   BADADVICE said:   What are the terms like concerning investor returns?

NDA
Term sheets are typically public. Otherwise it is impossible to 2nd road show/pitch day.

Not for these rounds, and the terms they operate with are not. There are a lot of Harvard business cases out there that show examples for companies like Hotmail though.

OP - give us more details! Tell us what you're doing, which startup, etc. This is exciting stuff.

As ankitgu and others have posted, the startup scene is still fairly hot right now (while the vc scene is fast dying). Plus the next batch of millionaires from zynga and soon Facebook, etc. will start pretending to be angel investors feeding more opportunity into the ecosystem. Sadly the success rate is still very low, even for YC classes. If you're looking for funding angel.co is a great starting place. I'm listed as an investor there (not an investor in the site) for full disclosure.

What this thread really needs but OP can't and shouldn't provide is details on his project (it's too early to be called a company). All the above info can already be found on the web.

ankitgu said:   EvilCapitalist said:   jkimcpa said:   BADADVICE said:   What are the terms like concerning investor returns?

NDA
Term sheets are typically public. Otherwise it is impossible to 2nd road show/pitch day.

Not for these rounds, and the terms they operate with are not. There are a lot of Harvard business cases out there that show examples for companies like Hotmail though.
I can assure you that you are wrong. Of course if you are not a qualified investor, no one would be talking to you, which would automatically prevent you from accessing the term sheets.

I wouldn't say they are public, but angel round terms are pretty straight forward. And the cadre of wannabe angels just ride whatever is out there. The key terms are convert vs straight equity, pre-money val, board seat, anti-dilution rights, and a few others on margin. What's acceptable on each term is known and company specific.

To give you an idea of what a term sheet looks like here's an online term sheet generator from one of the most reputable law firms in the Valley.

http://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/terms...

seattlesalaries said:   To give you an idea of what a term sheet looks like here's an online term sheet generator from one of the most reputable law firms in the Valley.

http://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/terms...
ws, Cooley, fenwick, and all the usual suspects got together years ago at the behest of the nvca and codified a standard term sheet, which many b schools us to teach vc classes. Even the ws generator is for series a or higher shares. Angel round will bypass the vast majority of vc terms and often be a convert to the series a. Best companies will get a $25k check from Dave @ 500 startups or Jeff @ soft tech with a handshake to write up a term sheet. These more formal angel / micro-VCs expect a 80+% failure rate. Todays angel scene is dominated by unsophisticated spray-and-pray investors. Pick well and good luck!

Venturion said:   seattlesalaries said:   To give you an idea of what a term sheet looks like here's an online term sheet generator from one of the most reputable law firms in the Valley.

http://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/terms...
ws, Cooley, fenwick, and all the usual suspects got together years ago at the behest of the nvca and codified a standard term sheet, which many b schools us to teach vc classes. Even the ws generator is for series a or higher shares. Angel round will bypass the vast majority of vc terms and often be a convert to the series a. Best companies will get a $25k check from Dave @ 500 startups or Jeff @ soft tech with a handshake to write up a term sheet. These more formal angel / micro-VCs expect a 80+% failure rate. Todays angel scene is dominated by unsophisticated spray-and-pray investors. Pick well and good luck!


I understand maybe half of this comment....

Google/read/ask/pm.

EvilCapitalist said:   ankitgu said:   EvilCapitalist said:   jkimcpa said:   BADADVICE said:   What are the terms like concerning investor returns?

NDA
Term sheets are typically public. Otherwise it is impossible to 2nd road show/pitch day.

Not for these rounds, and the terms they operate with are not. There are a lot of Harvard business cases out there that show examples for companies like Hotmail though.
I can assure you that you are wrong. Of course if you are not a qualified investor, no one would be talking to you, which would automatically prevent you from accessing the term sheets.

1) I'm one of the founders of a company that is currently raising over $2M in the current round. I could still be wrong though.

2) Let's look at RealD, the 3D technology guys in movie theaters.

SEC Page: http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=00...

Their last round before going public made this filing: http://www.sec.gov/Archives/edgar/vprr/08/9999999997-08-049138

Their S-1 was the filing to take it public in an IPO: http://www.sec.gov/Archives/edgar/data/1327471/00010474691000358...

You can see a little if you scroll down to F-27, but there isn't any detail on the actual agreements.

Actually Dan Primack talked about a filing companies used to have to submit that spelled out quite a few details, but you are right in that there is no regulation requiring a term sheet to be made public. A few data sites are good at getting round sizes, pre-money vals, and major investors, but not much else. You're likely never going to know if there's a ratchet, participating preferred, liquidation preference, or any of those details unless you're connected to the deal. By the time an s-1 arises all those details have been whitewashed through drag and tag conversions, etc. or just plain expired given value accretion through rounds.

Mis-typed.

A bit of a departure OP, but have you come across any groups in the bay area that are good networking for non-software startups? Mechanical or chemical devices/processes, etc?

motuwallet said:   congrats OP, I remember your previous post. Did you and/or your friends already have an idea in mind before attempting this or did you just wing it on the fly? How well formed was/is the idea?

It started out with a simple problem one of our cofounders experienced. We quickly made an app that solved his problem and also showed it to what we thought would be our target market. Those discussions eventually gave us the information we needed to create our current product. Nothing super crazy. We made something that we thought might be useful and chatted with people to see if it was actually useful.

couponhed said:   A bit of a departure OP, but have you come across any groups in the bay area that are good networking for non-software startups? Mechanical or chemical devices/processes, etc?

I'd recommend Meetup.com. Also, if you're in the Bay Area, you should stop by the talks (software and non-software) they hold at Stanford/Berkeley. You'll meet a lot of likeminded individuals in your field.

So, any recent updates?

Have you made it on TechCrunch yet?

jkimcpa said:   Have you made it on TechCrunch yet?TC is useless. It brings nearly zero traffic.

TechCrunch won't bring traffic, but it's an important part of hiring and raising money.

it's also extremely annoying yet still a good read

Skipping 37 Messages...
seattlesalaries said:   
That being said, if you're looking to do a tech startup there's no other place to be. All other things being equal, a startup in the Valley will do better than a startup elsewhere simply because there's a huge pool of technical talent and investors here. Every week there's at least one startup party or networking event which leads to meetings and coffee with potential investors. At the very least you meet a bunch of very smart and very interesting people.


Oh, I dunno... Lots of startups in Austin, Texas. Lots of investors also.
Salaries, which are spiking this year are lower than CA, but the cost of living more than offsets the difference.

Good luck on your business.. I hope it is extremely successful!



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