Is it wrong to begin a post with a huge, screaming “COME BACK TO EARTH, GEN Y“? Because if so, I’m going to be in trouble. But I was at BarCamp, and I think we didn’t get to have the one conversation which would be most important for many of the BarCamp attendees. The conversation about where the money comes from for all this stuff we wanna do.
I’m 37 years old. I’ve spent the majority of the last 12 years–my prime adulthood–wrestling alongside my spouse and others with the whole Startup Company thing. While a lot of people my age were getting married, having babies, buying Starbucks and new cars we were always working to nurture various nascent corporations. So I know what I’m talking about when I lay down the groundspeak about what this road is.
I realise that a lot of people–especially other Gen-X and Yers–think that the whole Tech Bubble instant money thing can happen to them. So, while all you doe-eyed folks I saw at BarCamp run around with your open bottles in search of that lightning, I thought I’d explain a few things to you. Oh, and if you are into that whole “don’t listen to the naysayers, follow your dream!” stuff, you may want to skip this post. Because while I’m not naysaying, I will show you that following your dream isn’t as pretty as it sounds on the back of a t-shirt.
- Angel Investors and Venture Capitalists aren’t your drinking buddies.
You may think you have the coolest idea since sliced bread. You may think you have a huge niche all sewn up. Thing is, you probably don’t. And what you think is cool and edgy is most likely something the AI and VC community have seen 50 times before their breakfast this morning, and a million times before that. If you want investment money, you need to have a business plan. And that business plan needs to incorporate SOLID financial projections. You must show realistic numbers coupled with a sound business model designed to generate those numbers. AI and VC don’t go in for the patter of “we’ll enlarge the community” or “we’ll give a new voice.” Financial investment is not musical theatre. You can’t win them over with a pretty song.
- Angel Investors and Venture Capitalists Know Copyright Law
There are a LOT of business models out there which involve brokerage. You’re either trying to sell an amalgamation of music through your Web Radio, or video or writing through your portal. The current models usually involve brokering content in exchange for generating revenue through ad dollars. Internet Radio (and believe me when I say that I know extremely well whereof I speak) has burned a lot of VCs. Why? Because the copyright on that material–once a gray area–has now been shored up. There were a lot of VCs who lost a lot of money when the Internet Radio startups watched their business models fold as they failed to meet copyright-holder’s demands. If you are advancing some type of brokerage technology you had better be very clear on where the copyright protections lay, and who holds copyright on the material you are brokering.
- Angel Investors and Venture Capitalists Don’t Give Money Away
If you get AI or VC money, be prepared to answer to the strictest boss you’ve ever had. Be prepared to live up to your projections and do so right away. These investors now own your company. And they own it because they want to make even more money. If you don’t make them the money they’re expecting, you will be fired from running your own company. I’ve seen it happen more times than I can count. I’ve also seen the AI and VC folks demand a complete overhaul of the company and its structure. In short, I can’t count high enough to list the number of times I’ve seen someone slave over a startup company, get to the point where they get investment capital and then get replaced by the investors.
- Brokerage Models Profiting off Ad Dollars Are Dead
I alluded to this before, but I want to state it again for the record. If you want to have some cool tech startup designed to be so popular that all the kids come to it and so you sell lots of ads, that’s great. But don’t expect VC money for that type of business model. There isn’t any right now. The risks of brokerage are too high and the payoff is too limited. Yes, that model works for Google and YouTube. It doesn’t really work for anybody else. The numbers aren’t large enough to interest VC. If you want VC money, you need to come up with a subscriber-based model.
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Yo Kat. I agree with you 100% here. That was one talk that I would have liked to participate in, especially if led by a local VC. I’m closing a $150K angel round now. It’s not much, but I definitely have learned tons of things that I would like to ultimately share. It’s a brutal process.
Katherine. Excellent article and great in light of the BarCamp experience and the new rush of economic excitement thats likely the follow the election of a new mayor. You clearly have more experience and knowledge in the area of VC. Alternatively, I question your blanket rejection of non-subscribed business models. With A-Z social networking sites increasingly becoming available from everything from travel buddies and niche cars to golf and couch surfing. (although to be true, that money may be down now & skepticism may be higher now & the momentum may be gone) The market on the video and photo side, though, does to my young eyes seem likewise robust, but perhaps bloated. How many ways do we need to upload our photos, when everyone and their moms are on flickr??? From an outsider perspective…DIY-sites seems to be going nuts…but my guess is only hyper-niches are left there. Again, very informative…great post.
You indirectly raise an important issue in my mind. Before I left DC in early August, a couple folks got together after our monthly Social Media Club and talked about how all the DC networking events never included VC’ers…which from our
perspective limit some of their value (selling other people on your tech idea may help the idea, but doesn’t necessarily get it launched). Events that were Tech Cocktail (started in chicago) + VC would be an interesting and perhaps useful model. That said…more cool tech events in Nashville would be rad! It was great in DC to have one site (beyond upcoming) to find out about events….www.dctechevents.com Very simple, but very helpful.. Ok time to shut up… Have a great day!
Alternatively, I question your blanket rejection of non-subscribed business models.
I was thinking about that at lunch, and realise that perhaps I should soften it up a bit.
Non-subscriber ad-driven (NS/AD) models work in only very limited circumstances:
1. As ancillary pieces of a larger brand build-out.
2. Hyper local niches.
In other words, they DO work, but their scope is limited. You can probably, after niche building, expect to see your NSAD model work on a smaller scale. I fully expect to see Music City Bloggers (a good example of a functional NSAD with a hyperlocal niche) reach annual ad revenues of $30K after 24 months, given the right ad pitches.
I don’t see any nascent NSAD reaching the critical mass necessary to acheive YouTube-style monies, Jed Clampett-style moneis or even Penelope Trunk Bikini monies, though.
Events that were Tech Cocktail (started in chicago) + VC would be an interesting and perhaps useful model.
They would be most useful, indeed, on one hand. On the other hand, I can’t see many VCs openly attending. There WERE VCs at BarCamp Nashville…they were just undercover. That’s how many VCs prefer to attend these types of things. Because once the word is out that there is a VC in the midst, everyone starts getting crazy and going all dollar-groupie out of nowhere.
I think at the very least it’s helpful for people seeking VC money to talk about their experiences with others seeking it. Call it the networking of needs if you must.
But that way everyone learns who to approach, who not to approach, etc.
I’m a writer…every portion of any writer-related events include a “how to get published” workshop. I see a “how to get financed” workshop along the same type of lines for the tech folks.
hat said…more cool tech events in Nashville would be rad!
Agreed. Entirely.
I guess you know about vator.tv for pitching ideas?
http://bambi.blogs.com/bambi_francisco/2007/08/vator-reports-s.html
I think a lot of people get all starry-eyed thinking about being their own boss only to realize that when you need money from investors, THEY are the bosses, not you. I’m having to explain that to some folks now. People don’t just write you a check and forget about it. People who have money have it for a reason.
Kat. Curious…do you all plan to ultimately monetize MCBs? If so, take a look at AdRoll. I know the guy who’s launching it, and it basically lets people build distributed ad networks across blogging communities.
I’m just going to chime in quickly here, with an observation based on my own experience and my own brief visit to the “instant money” spigot back just before “Web1.0″ blew up in… ohmigawd that was like SEVEN years ago!
What I want to add to the discussion is this thought: that what often gets overlooked in the discussion of “AI” and “VC” paths to Digital Moguldom is what we might call the “purely organic” path. By “organic” I mean the kind of business that can start out really small and both sustain itself AND GROW based entirely on the revenue generated. I know, I type that and think “how unrealistically idealistic.” And I would probably think that if I had not had precisely the kind of experience of which I speak.
It seems that the model that gets the most visibility is the “I had an idea and got a whole bunch of money for it…” model. That’s what the AI and VC communities seem to flourish on, after all, so that’s what gets the attention in the media, new and otherwise, and so that’s what people aspire to.
I also know that the environment is very different nowadays then it was in 1995 when I and a couple of friends started kluding together some HTML, registered a domain, and launched a website. Now it’s all flash-and-java driven, database-powered, and it’s all about the interaction, stupid. Technologically things are more complex today than they were back in ‘my’ day in the previous millennium. But by the same token, the skill-sets that todays sites and businesses are built on are also more pervasive. There are more people now than ever who know their way around php and MySQL, more people with design smarts and “architectural” savvy at all levels. So I don’t think the idea is entirely out of step.
I know three guys who started an internet business with less than $1,000 and four years later sold it for $3-million, without ever borrowing so much as a dime. That may not be Mark Cuban or Jerry Yang type dough, but it’s a start.
Granted, the startup year was 1995 and the “liquidity event” was in 1999, by which time things were thoroughly insane.
But I dare say that model is still viable, and it might be time to try it again.
So much for chiming in quickly….
Pasadena Angels Investors
By Al Schneider (Vice Charmain, Pasadena Angels) and Joe Platnick (Director, Pasadena Angels)
The Pasadena Angels is a group of over 100 accredited entrepreneurial investors who provide early-stage financing and counsel to emerging companies located i…