First A Few Disclaimers
One of the readers of this blog, who shall remain anonymous for confidentiality purposes, emailed me questions similar to the title of this post yesterday. He’s building social software that some investors have shown interest in. Part of this post was my reply to him.
Also, while I’ve raised six figures in Angel funding, that was in an entirely different market (2007) than today. That said, I’m fairly well read and keep up with the state of the funding environment vigorously, but you should consider my advice below based on these caveats.
Funding Now Or Later?
Get the funding now if you can get it. The initial Angel round isn’t that hard these days, comparatively speaking, of course. Series A is proving much harder, however. And a down round (a lower valuation at a later funding round) won’t help future funding if you don’t show valuation growth at Series A.
Thus, I was thinking that minimizing, to a point, your current valuation could actually be a positive, because you’re more likely to increase the valuation for Series A and Series B. So, I’d take the money, sprint as fast as you can, then raise more (series A) when you’re getting close to needing it. With VC investment seemingly slowing and becoming more competitive, it seems to make sense.
How Much Do I Raise?
Obviously it’s all situation specific, but most people in the industry tend to think enough cash flow to last about 18 months in exchange for 10% to 20% equity, at least for the first few rounds. And typical Angel investments seem to be in the $250K to $750K range.
Lightbank’s Deal Terms
One of my last MBA classes at the University of Chicago was with Erik Lefkofski and Brad Keywell, the founders of Groupon, Lightbank, Echo Logistics, Starbelly, etc. They actually told us their typical deal terms. I like transparency, especially in free market economies, so here you go:
Lightbank has very little term sheet noise (i.e., preferences), but you have to give up 33% to 50% of your business in common stock. Lightbank’s sweet spot is investing approximately $500,000 for pre-revenue businesses with a great idea (typically between $200,000 to $1,000,000).
This gets pretty complex pretty quickly so my advice to you is to just hire an amazing entrepreneurship law firm. One of my best friends I’ve known since diapers works for one, and they’re pretty amazing. One of their clients made a little video game you might have heard of: Halo. Oh, and they also made the Call of Duty franchise.
I asked Eric how much money it takes to build a good internet company, both the technology and the marketing/advertising. He said it takes at a minimum $300K, but typically takes closer to $500K. Here’s a little inside information (shh…):
Lightbank will typically invest between $200,000 to $1,000,000 (typically $500,000) for between 33% and 50% of your startup in the form of common stock, but does not have any restrictive covenants.
When To Launch
Now that you’ve built your baby, when do you let her out into the world?
I say release the MVP ASAP, at least to friends and family. Because unless it’s an iPhone app, screw what people say about the launch. The hard part is growing it after initial traffic spike.
But, if it is an iPhone app, you want to get in the top 100, 50, 10, 1. And the only way to do that is from a large amount of simultaneous downloads in the shortest amount of time possible. Once you get on top of the charts, you’re much more likely to get discovered and your adoption rate will accelerate.
How Do I Break The Top 100?
I met with an internet friend recently during his book tour through NYC (he just published a design book). He had an interesting strategy that worked out well for him. He amassed a list of pre-orders through Kickstarter (you could do this through an email sign-up form, if you’re selling software and not a book), hired people through Amazon’s Mechanical Turk, and on launch day these “employees” ordered each of the pre-ordered books from Amazon.
What did this do? It shot him up to the number 1 book in his category on Amazon, thereby getting more exposure.
So yes, the launch is important to get an initial traffic spike (and timing everything just right is extremely important), but the hard work sets in a few months after that when nobody wants to talk about you anymore.
And that period separates the men from the, uh, Muppets.
