The worst mistake we made at Moreover was to raise too much money.
The Bay Area prides itself on the sophistication of its investment structure, but most of the successful Web 2.0 ‘exits’, from a founder perspective, have been non-Bay Area companies or ones that didn’t raise too much cash.
Perhaps the further you are from Mountain View, the less likely you are as an entrepreneur, to be seduced by Bay Area style startup investment.
If you are in a casino and you are $5M up, the best thing you can do is walk away from the roulette table.
If you are a young entrepreneur $5M is a life changing experience and selling a company after bootstrapping or a seed round of investment can give you that. A series B round could very well give you more – but it is a much bigger gamble and as recent evidence suggests, puts you out of range of the big 5 (Yahoo, Microsoft, Amazon, Google, Ebay) without revenues, strong revenue predictions or extensive due diligence.
If you really have a $100M plus idea, you may need a decent VC and plenty of cash, but there are a lot more $10M ideas, and 50% plus of $10M may be a much more realistic goal than 25% of $100M.
A VC is making a very high risk investment and will want to think he or she can get a 10x return and will possibly have preference shares that force you too to make that gamble – i.e. you only get a payback if there is a significant return.
If you raise money – pretend mentally that you have borrowed the cash on a charge card at 20% APR – you should be confident that you could pay that off. If you don’t feel that pressure then there is something wrong.
Similarly, because VC money is high risk – but the risk spread accross a portfolio of other companies it is in the interest of the investor to push for a business strategy that aims for that 10x return at the risk of making nothing. In other words the investment was high risk to start with, so why should the VC re-gamble with lower odds.
There is a current batch of Web 2.0 startups that have been snapped up quickly by companies like Google and Yahoo for a price that for them is sometimes justified to get really good people, but which is payday for founders that still have a large percentage of equity.
This perhaps changes current tech. startup equation, although one should never start a company to be bought, but because you really believe in it. And if you really believe in it you should surely max out your credit card and raise cash only when you really need it.
Here is a list of some current ‘web 2.0 ish’ startups, the common themes that stand out – the ones that have ‘exited’ are not dominated by Bay Area companies and didn’t raise several rounds of cash:
Dodgeball:
Bay Area: No; Second round finance: No; Acquired: Yes
Delicious:
Bay Area: No; Second round finance: No; Acquired: Yes
Flickr:
Bay Area: No; Second round finance: No; Acquired: Yes
Gawker:
Bay Area: No; Second round finance: No; Acquired: No
Weblogs Inc.
Bay Area: No; Second round finance: No; Acquired: Yes
MySpace:
Bay Area: No; Second round finance: Yes; Acquired: Yes
Friendster:
Bay Area: Yes; Second round finance: Yes; Acquired: No
Xanga:
Bay Area: No; Second round finance: No; Acquired: No
Technorati:
Bay Area: Yes; Second round finance: No; Acquired: No
Six Apart:
Bay Area: Yes; Second round finance: Yes; Acquired: No
Odeo:
Bay Area: Yes; Second round finance: No; Acquired: No
Oddpost:
Bay Area: Yes; Second round finance: No; Acquired
Bloglines:
Bay Area: Yes; Second round finance: No; Acquired
Congrats to Josh Schachter and all at Delicious.
Of couse if you bootstrap a company from scratch without any investment, like Gawker, then you are not under any pressure to ‘exit’, you have what everyone should strive for – a real business.