Tim Marman's Loosely Coupled

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• Serial Entrepreneurs and High Valuations

  I wrote in the past that sometimes you can take too much money - doing so creates certain expectations for an exit that might not be achievable and limits your flexibility. In the context of the discussion last week, I think it's important to highlight that these economics are not always the fault of the venture capitalist. For example, Jason Calacanis said you should take as much money as you can get and Marc Andresseen said “ in general, [you should raise] as much as you can ”. Billions or Bust Another one of my favorite recent examples is Slide, founded by Max Levchin of PayPal fame. Slide recently raised $50M from T-Rowe Price and Fidelity - giving up 9% for a pre-money valuation of roughly $500M. Granted, T-Rowe Price and Fidelity probably aren't quite expecting the same kind of returns over the same time frame as a VC, but it still sets a ridiculous high floor for an exit. That is, in part, the plan. As Sarah Lacy put it , "Levchin, who co-founded and later sold PayPal... Posted Jun 09 2008, 09:06 AM by Tim with | with no comments Filed under: Web 2.0, Business, Entrepreneurship, Startup, Venture Capital, NextNY

• Innovation, Disruption and The Economics of Free

  Hank Williams managed to stir up quite the controversy with his recent post lamenting the rise of free and blaming the VCs . His assertion is that the venture capitalists have made free, ad-supported businesses the norm and effectively "ruined it for everyone else" (my words). I believe it should be possible to start a small business and to have a small number of profitable customers, and to earn a living. From there, it should be possible to work hard, and to grow your business into something substantial. Until recently, this was the American way, and it applied to technology as much as to any other business. But no more. In today’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business. If businesses were based on the idea that people paid for services then small... Posted Apr 08 2008, 10:41 PM by Tim with | with 4 comment(s) Filed under: Rants, Innovation, Business, Entrepreneurship, Startup, Venture Capital, NextNY, Notches

• TheFunded brings more transparency to raising venture capital

  Asymmetry of information plays a major role in negotiations, and it is often said that venture capital investments are made under extreme information asymmetry. On one side of the table, the limited partners don't know much about the company, the VCs know a little (relatively speaking), and companies know everything. This is one reason VC investments are made in stages - it serves as an incentive to keep the company on track and a way to minimize the risk. When it comes to funding, though, the VCs also typically have an advantage in the sense that they do a lot of deals and know the landscape of the business better than an entrepreneur, particularly a first-time entrepreneur. TheFunded started as a site to review VCs. Like in the investment banking world, a VC's reputation is everything because he relies on repeat business. In theory, transparency in these dealings is a good thing, but the question was whether the data was actually worthwhile. As Charlie put it , TheFunded is "1... Posted Jan 27 2008, 04:16 PM by Tim with | with no comments Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• How do you get started raising venture capital?

  Alex commented on my previous post about raising too much venture capital. This is great. However, some of us are really puzzled by the whole VC process to begin with. It would be nice to get some "semi instructional" slash "story of my life" about making a transition from the basement to the boardroom. With Notches, we're very early in the process. We've had a number of meetings with VCs to sort of introduce the idea, but we're definitely before the stage where we're looking to raise Series A funding. I'd love to, and probably will, talk more about the lessons learned once we are further along in the process. A good place to get started to understand the whole process is Get Venture , a blog recently started by Mark Davis at DFJ Gotham. He just recently started blogging, but man he has generated a lot of great content in a short time. Check out the Entrepreneur's Guide to Raising Venture Capital . AskTheVC , run by Brad Feld and Jason Mendelson... Posted Sep 13 2007, 06:10 AM by Tim with | with no comments Filed under: Business, Entrepreneurship, Startup, Venture Capital

• More about raising too much venture capital

  I recently wrote about the dangers of "taking as much as you can get" in a series A. Shortly after that, Dick Costolo wrote an absolutely amazing post about raising too much money. Nonetheless, I don’t think it makes sense for most entrepreneurs to raise big A rounds, because you don’t want to price yourself out of interesting opportunities in the first year or two. By raising too much money, you force your hand on the kind of company that you have to build, whether you want to or not. That was exactly my point. It creates certain expectations for an exit, and you're making that commitment very early in the life of the company. This may not be as big of a deal for a seasoned (and well-off) entrepreneur like Jason or Marc, but it can be a big deal for the rest of us. Let’s look at two scenarios for a very promising startup with technology that may be of strategic interest to several profitable public companies: Scenario 1: You raise 1 on 3 pre in an A round, so you’ve sold... Posted Aug 24 2007, 11:49 AM by Tim with | with 1 comment(s) Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• What's the best state to incorporate in? (Hint: Delaware)

  AskTheVC recently addressed the question of what was the best state of incorporation . The short answer is one of 3 preferred states: "Delaware, whatever state the company is in and whatever state(s) the VCs are located in." Obviously, the last is hard to determine if you're going to incorporate before you close financing. California is notoriously employee-friendly so it should be avoided. Some of those laws may still apply if you are based in California, but if you are elsewhere you should definitely assume those burdens. New York is also undesirable. It's fairly balanced when it comes to dealing with owners vs. employees, but the one big red flag is Section 630 of the NYS BCL. This section states that the top 10 shareholders are liable for employee wages if the company goes out of business and employees aren't paid. This statute does not apply to foreign companies (i.e., those incorporated in other states) even if they're doing business in New York. Considering... Posted Jul 23 2007, 05:53 AM by Tim with | with 5 comment(s) Filed under: Web 2.0, Business, Law, Entrepreneurship, Startup, Venture Capital, NextNY

• Valuation: Sometimes you *can* take too much money

  If you're raising capital for a technical startup, how much should you take? Marc Andreessen says as much as possible , a sentiment echoed by Jason Calacanis . Jeremy Liew expounded on some of the risks of having a valuation that's either too high or too low . Marc and Jason are two guys who definitely know about building successful companies (and, perhaps more importantly, successful exits). Jeremy's example focused on an angel round that gave a company a valuation of $30m, where he most certainly would have valued the company less than that (and thus either passed on, or lost, the financing). Despite what Marc and Jason say, though, you can raise too much money in a given round - not because of subsequent rounds, but because of the expected exit. After all, as Jason says, if you raise "too much" money in an earlier round, the big challenge is just not too burn it too fast. This applies especially to VC rounds, which are typically very standard as compared to an angel... Posted Jul 10 2007, 09:46 PM by Tim with | with 4 comment(s) Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• There's no such thing as Web 2.0

  I've said before that I hate the term Web 2.0 but that it's more than a buzzword . Perhaps what I meant to say is what Marc Andreessen said: there's no such thing as Web 2.0 ( via Fred Wilson ) - thing being the key word there. The first Web 2.0 conference was held in the fall of 2004, and coincided with a large number of people in the tech industry (myself included) peeking our heads out from the fallout from the nuclear winter of 2001-2003 and realizing that the Web was not only not dead, it was thriving. From there, it was easy to conclude that "Web 2.0" was a thing , a noun, something to which you could refer to explain a new generation of Web services and Web companies. Many people have since pointed out that there is no clear definition of Web 2.0. Tim O'Reilly, whose organization created the conference (and the term), attempted to define Web 2.0 as follows: "Web 2.0 is the network as platform, spanning all connected devices; Web 2.0 applications are those that make the most of the... Posted Jun 11 2007, 03:09 PM by Tim with | with no comments Filed under: Technology, Software Development, Web 2.0, Innovation, Entrepreneurship, Startup, Venture Capital

• Choosing a corporate entity for your startup

  Generally speaking, tax and liability drive the choice of entity. Taxation From a tax perspective, all of the entities except for C-Corps are known as "pass-through" entities, where any income and losses show up on the owners' tax returns. With a C-Corp, taxes are paid by the corporation itself, independent of the individual owners. If you anticipate huge tax losses early on, one of these pass-through entities can be desirable (unless you anticipate taking VC money soon). In some cases, you can even allocate the income and losses differently if you have one owner who can take advantage of the tax loss while the other does not. (There are limitations on the tax losses you can claim with a pass-through entity - the At-Risk rule and limitations of Passive Activity losses - but these are not relevant for now. I'll try to discuss this more in-depth in a future post.) Liability Corporate forms can also provide liability shields. Partners are personally liable for any debts and torts of the partnership... Posted Mar 06 2007, 06:22 AM by Tim with | with 2 comment(s) Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital, NextNY

• The Dark Side of Drag-Along/Tag-Along Rights

  Michael Arrington talks about the sale of FilmLoop . Due to drag-along rights, ComVentures was able to force an unfavorable sale to another company in its portfolio - leaving the founders with essentially nothing. One day, the founders and employees of FilmLoop had a viable company with $3 million in the bank. The next day they had no stock, no job, and no company. Drag-along rights (and its counterpart, tag-along rights) are fairly standard terms in a stock agreement. Drag-along rights mean you can force the other shareholders to join in the sale of the stock at the same price, terms and conditions. This would normally come into play if someone made an offer for the company but one of the founders decides not to sell - this clause allows the VC to compel the sale. Tag-along rights are the opposite, usually giving a minority shareholder the ability to participate in a sale - if the majority shareholder wants to sell, he can't do so without including the minority shareholder. I'll post more... Posted Mar 02 2007, 06:23 AM by Tim with | with no comments Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital