How much money should a startup raise? September 27, 2007Posted by jeremyliew in start-up, startups, VC, Venture Capital.
Some startups that I’ve met are not sure how much money they want to raise. Some think about raising money to last a certain period of time, others look to benchmark themselves against other startups and want to raise similar amounts of money.
There are a few schools of thought as to how to arrive at a target amount of money for a startup to raise.
Marc Andreessen says:
In general, as much as you can.
Without giving away control of your company, and without being insane.
Entrepreneurs who try to play it too aggressive and hold back on raising money when they can because they think they can raise it later occasionally do very well, but are gambling their whole company on that strategy in addition to all the normal startup risks.
Suppose you raise a lot of money and you do really well. You’ll be really happy and make a lot of money, even if you don’t make quite as much money as if you had rolled the dice and raised less money up front.
Suppose you don’t raise a lot of money when you can and it backfires. You lose your company, and you’ll be really, really sad.
Dick Costelo of Feedburner/Google says:
First, raise enough money to last about a year or a good six months after your next big milestone. Some people like to say “raise just enough to get you to and then you will be able to do a B round at a bigger valuation”, etc., but you want to give yourself some reasonable stretch of time to be product and strategy focused after the A round before you have to hit the road again to raise more money. It’s no fun having to think about starting to raise money again only a few weeks on the heels of closing the previous round. Second, you always need more money than you think you need, especially if this is your first startup. You can have a nice detailed spreadsheet that accurately reflects market salaries, rent, and more, but you will still require more money than you think.
In general, I tend to agree with Dick. Marc’s advice is good but raising too much money raises the possibility of greater dilution than necessary, and it may not be practical advice to entrepreneurs with a less stellar track record than Marc’s (which is pretty much everybody!).
Here is how I would advise a startup to think about how much money to raise:
1. Figure out what you’ll want to have done before you want to raise the next round. This could mean revenue targets, usage targets, product development milestones or whatever, but focus on a set of tangible achievements that you think will make your next round of financing easy to raise. These achievements should demonstrate a reduction of one of the three types of risk that VCs worry about (i) technology risk (ii) market risk (iii) implementation risk.
2. Figure out how long it will take you to achieve these milestones.
3. Figure out how much cash you’ll burn in this time. Do this carefully. With costs, you should be able to be pretty precise in your projections. Costs are mostly within your control (e.g. hiring) or variable to your achievement targets (e.g. bandwidth costs). However, be conservative in your revenue projections. These are not entirely within your control, and many startups miss their initial revenue projections.
4. Add enough cash to sustain six months of burn with no revenue to that time period. This is partly as insurance in case your development timelines slip (that NEVER happens, right! ;-)) and partly because raising money takes time. You should budget between one and three months between starting the process and having cash hit your bank account, more if you’re raising money over a period like the holidays when it might be hard to set up all the meetings you want.
This should give you a reasonable estimate as to how much capital to raise in your current round.
Google is making it harder for vertical search engines September 24, 2007Posted by jeremyliew in advertising, arbitrage, business models, google, Lead gen, Search.
DavidZHawk asks, “What if Google Declared War on Comparison Shopping Engines and No One Noticed?” and points to an Inside Adwords blog post (my bolding):
The following types of websites are likely to merit low landing page quality scores and may be difficult to advertise affordably. In addition, it’s important for advertisers of these types of websites to adhere to our landing page quality guidelines regarding unique content.
* eBook sites that show frequent ads
* ‘Get rich quick’ sites
* Comparison shopping sites
* Travel aggregators
* Affiliates that don’t comply with our affiliate guidelines
Comparison shopping sites and travel aggregators are just two classes of the many flavors of vertical search engine, although they monetize better than most because of the high proportion of transactional search queries. As a result they have been able to afford to buy traffic through Seach Engine Marketing (SEM) where other vertical search engines have not been able to afford to due to lower monetization rates.
When you combine this move to send less traffic to vertical search engines with Google’s more aggressive inclusion of “One Box” search results from Froogle and their other owned vertical search efforts, you start to wonder if Google is looking to keep more of its traffic recirculating within its own properties. iGoogle and Gmail were the first signs that Google might aspire to keep control of more of the traffic that starts there.
News can’t be an online only business September 19, 2007Posted by jeremyliew in advertising, business models, newspapers.
Sometime a picture is worth a thousand words:
From the WSJ today as they self referentially discuss if they will go from pay to free.
The rate of growth of online-newspaper ads dropped to 19.3% during the second quarter of 2007, down from a growth rate of 33.2% during the second quarter of 2006, according to the Newspaper Association of America.
The slowing growth online coincides with accelerating declines in newspapers’ print-ad revenue, casting doubt on whether newspapers will ever be able to offset their losses in print with gains on the Internet. Online ads still make up a small portion of total newspaper revenues, just 7% of the $11.3 billion total print- and online-newspaper ad revenues during the second quarter.
In late stage consumer markets, brand matters more than product September 14, 2007Posted by jeremyliew in branding, business models, Consumer internet, distribution, product management, start-up, startups.
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The WSJ today has an article about how hard it is for US auto makers to get “import intenders” to add domestic cars to the consideration set:
Just about every month, CNW Market Research meets with a group of would-be car buyers and plays a trick on them.
Sometimes the company, which specializes in auto sales trends, takes a Toyota Camry, removes any identifying logos, and tells them it’s a new model from one of the U.S.-based auto makers. Or it takes a domestic car and tells them it’s a Toyota or another import make.
Either way, the result is the same. “If they think it’s an American car, the perception of the vehicle falls dramatically,” said Art Spinella, vice president of the Bandon, Ore.-based firm. “Detroit really gets a bum rap in the U.S.”
When I was at AOL we did a similar experiment for search. We took search results from multiple search engines, stripped branding and UI, and asked users what they thought. The marks were pretty even across the board, but when branding was put back, Google was thought to have the best results ever time. PC World found similar results in April.
As I’ve mentioned in the past, there are three phases of adoption for a new consumer technology. In the first phase distribution is paramount, in the second product is paramount, and in the third branding is paramount. Competing on the wrong dimension at the wrong time may not move the needle, as Detroit is discovering.
Virtual worlds, real economics September 11, 2007Posted by jeremyliew in economics, gaming, mmorpg, virtual worlds.
A couple of weeks ago I wrote about how virtual worlds can generate very real emotions. Alex Tabarrok’s blog Marginal Revolution, notes a post from EVE’s (the space based MMORPG) economist that shows that virtual worlds can also generate real economic phenomena. In particular:
EVE consists of more than 5000 solar systems in 64 regions. The solar systems are connected in a complex web allowing for goods to be moved from one end in the Universe to another. Pilots have to be careful because in low sec and zero-zero security zones there is always the danger of being attacked by gangs of pirates looking for easy prey….
EVE is so large it is difficult for anyone to grasp what is going on in all the regions at any given time. Yet the markets seem to be very efficient at distributing information resulting in symmetric prices throughout Empire space (and even further). This is clearly visible in figure 11 which shows the price for zydrine [one of the more valuable minerals that is used for manufacturing in game] in three different Empire regions.
As one of the comments notes:
The main way to analyze a video game economy is in terms of the one truly scarce resource: player time and effort. In Eve, in order for a player to perform arbitrage, he has to physically move the good from one place to another – thus players will only do so if the profits are worth the time spent moving the goods around. Zydrine is a relatively dense good, in terms of value per volume; a small ship can haul thousands of units of zydrine, so a 200 isk/unit price difference between regions can be exploited for millions of isk in one trip. Another mineral, Tritanium, is only worth on the order of 3-4 isk per unit; its price can be a lot more volatile, especially in uncivilized regions where a large cargo ship can be attacked and destroyed.
Does anyone know of other studies done on the virtual economies in other MMOGs, casual online worlds, or social networks with virtual goods?