Posts tagged Funding
Pinterest RePins Its Social Media Prowess with $200 Million in New Funding
Feb 21st
Earlier this month, Search Engine Journal reported that Pinterest was seeking a fresh infusion of cash after a phenomenal year of growth. Yesterday the virtual pin board company confirmed that it had secured $200 million in new funding and has now been valued at $2.5 billion. ”Our focus is on helping millions of people discover [...]
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Cheap Tech And Offices Mean Startups Need Less Funding [Infographic]
Dec 27th
Entrepreneurs: This is the time to disrupt a market. Those holding out for a better market conditions are bypassing the opportunity of a lifetime.
Granted, two countervailing trends –- a slowly recovering national economy and a pull-back in later early-stage funding — are keeping things interesting for entrepreneurs. But at the same time, stubborn recession conditions like cheap office space and tech trends like cloud computing temper the need for big piles of outside money to get new companies off the ground.
This infographic comes from Bob Rizika, CEO of cloud computing, Infrastructure-as-a Service (IaaS) firm ProfitBricks USA, who obviously hopes lean startups see an advantage in operating in the cloud. The key points are that creating a startup now is cheaper than ever before, there are new sources of funding available, and the lingering economic issues can reduce competition:
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Remee & The Lucid Dream Of Crowd Funding
Dec 13th
It’s time to talk about the downside to these Kickstarter gizmos we keep buying. Do we have any bummed-out Pebble watch buyers in the house? Anybody buy an iPhone dock on Kickstarter only to have it obviated by the Lightning connector before you got it? I suspect there are many different versions of Kickstarter gizmo disappointment. Mine is the Remee lucid dream mask from Bitbanger Labs.
Yes. I backed an LED sleep mask for stimulating lucid dreams on Kickstarter. I am a hippie-nerd like that. And now I’m paying the price.
A Brief Foray Into Lucid Dreaming
Lucid dreaming is a highly desirable state of consciousness in which you realize you’re dreaming, but you remain asleep. With practice, lucid dreamers can learn to control their dreams, fly around, breathe underwater, talk to Aristotle, go to a Jimi Hendrix concert, whatever they can conjure. Lucid dreaming was celebrated in cult films like Waking Life (my favorite movie ever), and there’s an awesome list of other references on Remee’s Kickstarter page.
Conventional wisdom holds that one way to begin lucid dreaming is to remind yourself that you’re dreaming. That’s what the Remee lucid dreaming mask is supposed to do. It uses a timer, and its red LEDs blink patterns over your eyelids while you sleep. If you time it right, allegedly, you’ll see visual disturbances while you dream that will jar you into lucidity.
I’ve had one lucid dream that I can remember. I was about 18, visiting Hong Kong, jet-lagged out of my mind. I dreamt I was back at my old elementary school, which was uncanny enough that I realized I was dreaming. I immediately tried to fly. It worked for a few seconds. I got about 20 feet off the ground before my expectations about the laws of gravity set in, and I sank back to the ground, forgetting I was dreaming. It was briefly amazing, though. I’ve wanted to regain that power ever since.
Awakening From The Dream
So I backed the Remee. I knew it was an act of blind faith, and that the thing might not work – if I even got it at all. But I wanted to believe, so I voted for it. The Remee’s funding goal was $35,000, and the $80 level got you a mask. It raised $572,891, so it was a pretty massive hit. My mask took seven months to arrive, but founders Duncan Frazier and Steve McGuigan were communicative throughout the process, so I kept the faith and was psyched when I got it.
In my first few weeks of testing, though, I’ve had zero results.
For a while, the lights woke me up, so I used the Web-based, light-sensitive programming tool to adjust the timing and patterns, a totally cool and geeky experience. But now I just sleep through it every night.
I didn’t exactly expect a magic bullet, but I loved what the founders wrote about dreaming on their Kickstarter. They seemed even more jazzed and inspired than I was. So I contacted them to talk about Remee. And that’s where the real bummer set in.
Dreams Are For People Who Sleep
They wouldn’t take a call with me. Too busy. So I settled for an email interview. I sent in five questions that I thought gave plenty of opportunity for creative answers. But I got a minimum viable email instead:
ReadWrite: What got you into this problem? Why the interest in lucid dreaming? And where did you encounter the idea that this kind of technology could be used to stimulate them?
Bitbanger Labs: We’ve both been lucid dreaming since we were kids, but it just happened to come up in conversation in the summer of 2011. We had already been working on some tech projects and were intrigued at the idea of marrying the two ideas.
ReadWrite: How did you know there was a market for this? How widespread is the knowledge of the possibility of lucid dreaming?
Bitbanger Labs: We weren’t entirely sure how large the market would be — Kickstarter is a perfect match for a product like this, because it allows you to gauge interest while you seek backers. We were, of course, blown away by the response. I think we had an inkling that the community of lucid dreamers on the Web was aching for a new product, but we had no idea how many people to whom we’d be introducing the concept.
ReadWrite: What went into the particulars of the design decisions you made: number of LEDs, kinds of patterns available, timings of the intervals, that sort of thing?
Bitbanger Labs: We wanted to find a nice middle ground between effectiveness, comfort and low power draw. Six LEDs worked well for our relatively small power source, a CR2032 battery. The patterns and intervals, all of which are customizable, were mostly trial and error. We had a lot of time with the mask prior to launch to really fine tune stuff like this.
ReadWrite: How’s business? Has the idea caught on?
Bitbanger Labs: People are still interested! I think the idea of controlling your dreams is compelling enough that even someone who has never thought about it can get hooked on the concept pretty easily. We’re proud of how many folks we’ve brought into the world of lucid dreaming, whether they decide to support Remee or not.
ReadWrite: How have your dreams changed since you finished building this thing?
Bitbanger Labs: Dreams? Those are for people who sleep! But really, we’re finally getting to a point where things are settling back down and we’re getting a normal amount of sleep. We’re definitely still wearing Remee ourselves, not just for the effects but to continue to work towards making it better.
The Crowd Funding Blues
Wasn’t that kind of depressing? “Dreams? Those are for people who sleep!”
It seems that building the Remee, an inspired mission though it was, just turned out to be another grueling, low-margin hardware grind. Kickstarter allowed me to go shopping for an aspirational gadget, an accessory, and some talented guys knew they could ship it. They did what they set out to do in a bare-bones way. And that’s it. It’s a gadget, but nothing more.
I don’t see this thing taking off. It’s awesome to have one, but it’s not easy to use. They could never do the kind of support they’d need to do to keep a bunch of run-of-the-mill customers happy. It’s an early-adopter-only product. This seems endemic to the Kickstarter model for gadgets.
I talked to my friend (Disclosure: friend.) Micah Daigle about this matter. He’s a UX, branding and campaign designer currently consulting under the banner of Collective Agency, and crowd funding is one of his favorite tools to use and problems to solve.
“People just get buried under how much they have to do,” Micah says. “This is sort of the dark side of crowd funding. When you have three investors, you only have to impress three people.” When you have thousands, you’re orders of magnitude more accountable whether you succeed or fail. Crowd funding might get products out the door, but is it really a better way than business as usual?
The Wild West
Crowd funding platforms operate on a continuum. The real Wild West is Indiegogo, which has no screening process, and it has flexible funding, meaning projects can keep their funds even if they don’t make their goal. Giving to an Indiegogo campaign is a straight-up donation. You either have to believe in it or not care if it doesn’t work out.
Kickstarter is more constrained. It dictates what kinds of campaigns can be run. “They created Kickstarter because they wanted to see creative projects get off the ground supported by patrons from the community,” Micah says. It was ideal for films and artistic works like that. Of course backers wanted to see the dream come true, but it was also designed to be about joining a movement.
“What they nailed was a user experience format,” Micah says. They bundled the best storytelling device, namely video, a simple, clear call to action, and tiered rewards as an up-selling incentive. Backing a Kickstarter makes you feel like a part of something.
As Micah helped me realize, this foundation gave rise to two basic kinds of crowd-funding project. There’s the kind where you give because you believe in the cause, and there’s the kind where you’re speculatively pre-ordering a product. Enterprising gizmo makers saw this and thought, “Oh, this is a great platform on which to pre-sell my project.” As with Remee, Pebble and others, it works after a fashion. But Kickstarters for physical products are set up for a letdown.
Business More Like Usual
There are no guarantees about the end-to-end experience of a Kickstarter project because art has no guarantees. These gizmos are art, just like the films. “It’s a donation,” says Micah. He thinks there need to be more rules and explicit expectations about the differences between funding art versus gizmos, and they’re starting to emerge. “Kickstarter is not a store,” as its staff wrote in September.
But there are also new crowd funding platforms coming out with stronger assumptions. Christie Street is exclusively for physical products, which are heavily vetted and come with more buyer and inventor protections. There are also more formal arrangements like Crowdfunder, which is trying out crowd-funded equity for small businesses, which Kickstarter explicitly does not allow.
Failure Of Expectations
But just as much as we need new models for bringing great ideas into the world, we also need to adjust our expectations. “What we need to do is be a lot more understanding of failure as a culture,” Micah says. In Silicon Valley start-up culture, “fail fast” is a pervasive mantra. Failure is how you learn and get better. “We need to teach that to people and reset expectations around things,” Micah says.
If we’re more okay with failure, that makes the risks of crowd-funded projects more acceptable. I knew when I backed Remee that I might not get it, and that even if I did, it might not work. In my mind, it’s not a failure. It’s a work of art.
If I had walked into a store in a mall and bought this on a shelf, I’d probably want my money back. But I got this whole long, interesting Kickstarter experience alongside my programmable LED sleep mask. Who cares if I never actually had a lucid dream? For me, it was worth it for the story alone.
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Pingup Closes $4 Million Funding Round – Opens New Sales Door
Nov 28th
Just in: Boston based C2B texting innovators Pingup announced having closed a $4 million dollar Series A funding round led by Boston VC firm, Avalon Ventures. Pingup is pretty much the way an engagement “easy button” is supposed to look. If ever there was an innovation bred out of need, Pingup CEO Mark Slater and fellows [...]
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Why Hinterlands Startups Can’t Get Silicon Valley Funding
Aug 8th
Silicon Forest, Silicon Prairie, Silicon Beach, Silicon Hills, Silicon Sandbar. Nice ideas, all of them. But let’s get real. Startups anywhere outside the two major tech hubs of Silicon Valley and Silicon Alley have even more troublr attracting serious venture capital than they do finding a food truck with a decent bulgogi burrito.
Location Still Matters
It’s a central paradox of our time. The Internet and all its associated machines and gadgets enable anyone to be connected to anyone else -anytime, anywhere. But startups located anywhere other than a high-tech center may as well be pitching for investment in the Silicon Taiga. (Yes, there is one, don’t ask where.) Because relationship networks and personal contacts still matter.
Judy Sindecuse, CEO and managing partner at Capital Innovators, a startup accelerator in St. Louis, is trying to crack the code. Her organization runs a 12-week mentorship program for promising entrepreneurs in the St. Louis area and provides them $50,000 in seed funding. But then comes cap-and-gown time – and the hard part for Capital Innovators graduates: attracting real investment from bigtime VCs on the coasts.
That experience is consistent with research conducted by Aziz Gilani, a director at Houston venture capital firm DFJ Mercury. Last year, Gilani ran a study of 29 North American accelerators for the Kauffman Fellows program. He found that 45% of them produced not a single graduate who went on to raise venture funding.
Getting Past the Flyover Syndrome
“We’ve been very successful in our follow-on seed funding,” says Sindecuse. “We’ve had 13 companies graduate from the program and we’re somewhere between $7 million and $9 million in follow-on funding for our grads. But that follow-on money has come primarily from local angels and high-net-worth individuals in our network. What I need to solve is the A round of institutional venture funding.”
One plank in her pitch: it costs less than half as much to buy into a company in St. Louis than it does in Silicon Valley. She just has to convince the big-money folks that there are smart founders with promising companies around the U.S., not only in the graduating classes at TechStars and Y Combinator.
In the meantime, Sindecuse is working to develop a strong local investor community that can support companies coming out of Capital Innovators. A group of high-net-worth individuals in the St. Louis area recently banded together to create a seed stage fund called Cultivation Capital. The fund has promised at least $1 million over the next year to Capital Innovators grads.
Two Capital Innovators companies that have taken decent follow-on seed rounds are LockerDome, a social network that connects sports fans and athletes, which raised $2 million after over-subscribing on a $1 million round and plans to raise between $5 million and $10 million in the next year; and JBara Software, which makes customer-management software and raised $250,000.
The Missing Piece
But Sindecuse admits that the series A venture capital round “is still the missing piece and is something our region has always struggled with – building a network with the tech centers on the coasts. We have the local component nailed but getting that big round of capital is the next piece of the puzzle.”
If she can actually solve that puzzle, she’ll be one of the first to do so.
St. Louis image courtesy of Shutterstock.
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Finding – and Funding – the Next Mark Zuckerberg
Jul 3rd
It’s a startup truism: Investors fund people, not ideas. But ideas are much easier to assess than people. So how do venture capitalists decide if an entrepreneur is worth millions in funding?
The easy answer is: They look at the founder’s resume.
“The mantra in our business has always been ‘serial entrepreneurs,’” says Bob Ackerman, managing director at Palo Alto-based venture firm Allegis Capital. “These are people who have demonstrated they know how to navigate the minefield that lies in front of every startup. If they get through it successfully once, the bet is they can get through it the next time. In our current fund, two-thirds are serial entrepreneurs. And that shows up in the performance of the fund.”
Going Beyond the Obvious
That’s reasonable. But it’s obvious.
What about finding the next boy genius? The next Larry Ellison or Bill Gates or Marc Andreessen or Mark Zuckerberg? They’re all entrepreneurs who built significant companies (to put it mildly) on their first try. How do VCs and angels identify people like that, who will step up to the plate and hit a grand slam in their first at-bat?
That’s where judgment and experience come in. And that’s why many top VCs are former operating executives themselves. The idea is that experience can help them peer into the soul of first-time entrepreneurs and see if they have what it takes to get through the minefield. Are they coachable? Do they listen? Yes, they need the passion and enthusiasm, but they also need to keep one foot on the ground?
“The history of startup founders making it all the way to exit tells you the deck is pretty much stacked against them,” Ackerman says. “But there are examples of those who do it.”
He recalls a first-time entrepreneur he funded named Scott Weiss, who started a company called IronPort – and sold it to Cisco for $830 million. “When I looked at Scott, there was the confidence and bravado you would expect from an entrepreneur,” Ackerman recalls. “But behind that bravado was a lot of hard work, a lot of solid research and a lot of solid validation. I looked under the hood and found a tremendous amount of substance.”
The first time they sat down, Weiss asked Ackerman who in his network had managed a company that had experienced the sort of growth Weiss was expecting for IronPort. He said up front that IronPort was his first try and that he wanted to connect with veterans who could tell him right away if he started veering off track.
Maturity… and a Map
“To me, that demonstrated a tremendous amount of maturity,” Ackerman says. “Yes, he had that aggressive drive and enthusiasm and confidence, but also the realization that he could step on a mine anytime along the way and lose his whole thing. And he wanted to make sure he didn’t make those mistakes. I loved that.”
There are two ways to navigate a minefield. You can do it by braille. Or you can get a map.
“We look for entrepreneurs who go get the map,” says Ackerman, “who are prepared to do the hard work to develop that map rather than just rush through the minefield, hoping they’ll get through. Venture is all about people. An ‘A’ idea with a ‘C’ team has low probability of success. A ‘B’ idea with an ‘A’ team is a much better bet.”
Lead images courtesy of Netscape, Guillaume Paumier, World Economic Forum and Oracle Corporate Communications.
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Menture Capital? Why Women-Led Startups Get Less Funding
Jun 26th
Women are more social than men. There’s research to prove it. And there’s the anecdotal evidence. (How many men chat to the guy in the bathroom stall next door?) So women should do well in the pursuit of venture capital, which is at heart a networking game. But they don’t. Why?
A 2009 study by Dow Jones VentureSource found only 11% of companies that received venture funding had a woman CEO or founder. You’re likely familiar with the old-school explanations for this: girls aren’t as good at math and science, women aren’t as interested in starting businesses, women who do start a business are happier with a beauty parlor than a fast-track high-tech company, etc.
None of that is true. In fact, recent research by Cindy Padnos, managing director at Illuminate Ventures, shows that high-tech companies built by women are more capital-efficient than average, venture-backed companies led by women have 12% higher annual revenues and women-run high-tech startups fail less often than those run by men.
So why do women entrepreneurs in the high-tech field get funded less often than men?
Lakshmi Balachandra, an assistant professor of entrepreneurship at Babson College who researches women and venture capital, says the problem is that despite their innate social prowess, women are not engaged in the networks where venture funding circulates.
The Wrong Networks
“The women who are out there who need capital, they aren’t in the same networks as men. Men go to technology events and are aware of tech investors. Women are just not as connected as their male peers. What happens with women is, even if they are interested in starting a company, they may not be in the right circles to have access to capital.”
Another standby explanation for the shortage of money flowing to women is the essential chauvinism of the old-boy venture network. The thinking goes that VCs invest in entrepreneurs who are like them. And that’s true to some extent.
At the National Venture Capital Association’s annual meeting in 2008, legendary VC John Doerr said he’d always been attracted to startups run by geeky guys with no sex life. “That correlates more with any other success factor that I’ve seen in the world’s greatest entrepreneurs. If you look at Bezos or Andreessen, David Filo, the founders of Google, they all seem to be white male nerds who’ve dropped out of Harvard or Stanford and they absolutely have no social life. So when I see that pattern coming in – which was true of Google – it was very easy to decide to invest.”
Balachandra has also spent time as a VC but says that in her venture career and in her current research, she has not seen rampant sexism in the venture community. “Women who do go for capital are pretty successful at raising money. There is no bias there in terms of investors not giving money because a woman is leading a company, as long as that woman has the qualities investors look for: education, experience, the business metrics.”
But she adds that VCs do discriminate against entrepreneurs without a track record of success – something a lot of women don’t have. “Investors love investing in entrepreneurs who have come back after making a lot of money and have a new idea. For someone like Meg Whitman, that’s not a problem. But for the unknown quantity, not having the initial introduction, not having the same background makes it hard.”
Toys for Boys
Another reason VCs don’t invest in women-led startups is that the companies are often targeted at the women’s market, which is something most male VCs simply don’t understand. They like to fund companies that make toys for boys.
“The male view of what is venture-backable and high-growth tends to be technology, hardware or software,” Balachandra says. “If they don’t immediately see the market potential, they will pass. VCs always want to be the experts. They never want to admit they don’t know something.”
A lot of them obviously don’t know women. Maybe they should get out more.
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VCs Muscle Back Into Startup Funding – Some Call It a Bubble
May 2nd
After several years spent watching angels, super angels and incubators move in on their turf, VCs are flexing back. A new survey of startups shows venture capitalists are reasserting themselves in the funding game.
The reemergence of traditional VCs can make a big difference in how prospective startups look for funding – and could also signify a bubble.
The survey, by Palo Alto law firm Dorsey & Whitney, polled 336 startup CEOs and founders around the country and found a big jump from two years ago in investment by VCs. Startups in metropolitan areas whose companies got money from VCs rose to 27.5%, up from 17.1% when Dorsey & Whitney did its first survey on the topic, in 2010.
“When we did our first survey there was competition between VCs, angels, superangels and incubators,” says Ted Hollifield, a corporate partner in Dorsey & Whitney’s venture capital practice.
Angels were swooping in and entrepreneurs, a lot of whom had soured on the VC model, welcomed them with open hands. “But this seems to have sorted itself out,” Hollifield says. “Now it’s working such that angels and superangels and incubators are sources for early funding rounds but companies see those sources as a path that leads them to their second round of funding – from traditional VCs.”
That’s part of the explanation. Another part: Entrepreneurs want bigger rounds. The Dorsey & Whitney survey reports that the number of CEOs who raised less than $500,000 in total funding dropped to 62.8% from 75.8% in 2010. And 42% of CEOs in metropolitan areas now expect to land investment from traditional VC firms, double the number in 2010.
The money is available. Another survey (download PDF) of Silicon Valley VCs by University of San Francisco professor of entrepreneurship Mark Cannice, shows VC confidence up significantly in the first quarter, to 3.7 on Cannice’s five-point scale, from 3.27 the previous quarter.
For some observers, the VCs are partying like it’s 1999: “This is 1999 all over again, but this time it’s gotten worse,” Jeffrey Pfeffer, professor at Stanford’s Graduate School of Business, told The New York Times recently. “Companies are simply being founded to be bought.”
Don’t blame the entrepreneurs. When some guy in Gucci driving shoes waves millions in your face, you’d have to be a regular Andrew Mason not to take it.
It’s the oldest business model in the book: Make hay while the sun shines. Or before the bubble pops.
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SEOmoz Raises New Round Of Funding: $18 Million
May 1st
SEOmoz, the SEO toolset company, has announced they have successfully raised another $18 million in venture capital from Foundry Group and Ignition Partners. Foundry Group put in $15 million and Ignition Partners put in $3 million. Co-founder and CEO of SEOmoz, Rand Fishkin detailed the financials,…
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Bullpen Capital’s Duncan Davidson on VC Funding and “The Era of Cheap”
Apr 26th
For a technology startup company to launch an initial product and survive long enough to gauge its success, requires two-orders-of-magnitude less money today than at the start of the previous decade. This from a man who knows from having made bigger investments that are smaller: Duncan Davidson, Managing Director of Menlo Park-based Bullpen Capital.
Bullpen is one of a growing number of early-stage funds – or, perhaps more accurately, “earlier-stage,” since even his is no longer the first out of the gate. In an interview with ReadWriteWeb, Davidson explains how the latest industry to receive the disruption treatment has been the venture capital business itself, with the epicenter of the quake right around San Francisco.
For more of Duncan Davidson’s insights – along with those of five other top-tier VCs – download Scott Fulton’s exclusive 14-page report: “Growing Your Business In The Modern Economy: 6 VCs Weigh In.”
“There used to be the Four Horsemen of the IPO world, back in the ’80s and ’90s. They were some great, small banks: Robertson Stephens, Hambrecht & Quist, Alex. Brown & Sons, Montgomery Securities. They all went away; they got rolled up in 1999 and 2000 into these too-big-to-fail banking operations,” Davidson tells us. “The question is why? The answer is, they couldn’t make any money trading, [or on] giving analyst support for small stocks because the spread got too small.”
The spread he’s talking about is the decimalization of the U.S. stock market: The change led by NASDAQ in early 2001 to valuing stocks in increments from one-eighth of a dollar down to one cent. “When you make the spread a penny, only very high-volume stocks can garner economic value for the banks to be worried about it,” says Davidson. Firms that gave analyst support for small stock issues used to provide price target projections that had some meat between the bones because their highs and lows were separated by eighths of a point.
Believe it or not, this is where the change begins. When small fluctuations in stock value changed from 12.5¢ down to 1¢, the meaning of small stock got smaller. Decimalization forced analysts to tighten their spreads, the result being that their analysis looked like they were wasting their time commenting on penny stocks. It became unprofitable for the Four Horsemen to continue doing business independently. When they exited the scene, the small IPO market followed suit.
What followed is what the VC industry now calls “The Era of Cheap,” and we’re still very much in it.
Number of U.S. IPOs by year, 1980-2011, with pre-IPO last 12-month sales less than (small firms) or greater than (large firms) $50 million (2009 purchasing power). Credit: Professor Jay Ritter, for testimony before the Senate Banking Committee
The way startup funding worked at the turn of the decade, he describes, small firms would raise “seed round” capital from friends and family to get off the ground. From there, they’d make the leap to “Series A,” which used to refer to the first round of institutional capital invested. Davidson says, “Those are the funds you’ve all heard about: Sequoia, Kleiner Perkins, Mayfield and a whole bunch of great funds. The reason you had to do that back then was because it took $5 million to launch a company into the marketplace, or at least to get the technology done and see [how it performed].
“What’s happened in the last decade, the cost of launching an Internet product – forget other technologies, we’ll focus on Internet – has dropped from $5 million to $500,000 in 2005, to $50,000 today,” he continues. “Two orders of magnitude. That’s why a couple of kids in their dorm room can start a company, launch it, and see if anybody cares out there. With that great decrease in cost to launch something, you have the emergence of all these new funds. The emergence has been extraordinarily traumatic and disruptive on the venture industry.”
By Bullpen’s count, at least 80 new firms have been formed recently with the intention of helping newer firms raise smaller amounts prior to what’s still called the “Series A” round, though it may have become the fourth or even fifth rung on the totem pole.
A startup (or what the newly passed JOBS Act calls emerging growth companies, or EGCs) may not need a seven-digit investment until what’s called the “seed round,” but what’s really round three after the “accelerator round.” Bullpen may come into play with about $2.25 million on average, before “Series A” even begins.
“It’s all driven by the Era of Cheap,” says Davidson. “It’s all because it’s a lot less expensive to start a company than it used to be, so you keep the amount of funding in much, much less, and as long as you can before you go for big money.”
Davidson’s company explains that backers are looking for companies that can sustain leaner growth models. It’s still growth, mind you, but it’s more efficient, less wasteful, and a bit less self-assured. A company can validate its growth metrics, Bullpen believes, in as little as four to six months after its initial funding periods.
“You don’t know if these deals are real; it’s all an experiment. And the leaner you keep it, the more options you have with what to do with it. Once you put a lot of money in, you’re no longer lean and flexible and kinkin’ and jivin’ and trying to figure it out,” he says. “Now you’re on a bit of a race to actually prove out the value of the money you raise, and scale it. When you keep it lean, everybody has better options, and a better outcome when all the dust settles.”
The benefit for Bullpen, and other investors in its space, is risk avoidance. Having a little less money to burn drives the EGC to get its product to market on time. Then the risk of that product succeeding is lessened by network effects made feasible by app stores and digital distribution, driving up customer adoption. Risk to the company’s business model in the early stages is reduced by adopting this app store “template” that customers worldwide have already embraced.
“Look at Instagram, which got bought by Facebook. How old is Instagram? It’s not a very old company, and it just sold for a billion dollars. Zynga goes from zero to multi-billion-dollar company in four years. There’s been two fundamental changes here that have been overlooked by a lot of people, and this is why it’s fundamentally different than it was in 1999: One change is this Era of Cheap and the lean finance model… Everything’s better with the lean model.
“Money, in effect, can be a drug – it can be a problem,” he continues. “You get too much money, you lose flexibility instead of gaining it. You pay yourself too much money, you sort of relax, you don’t have the same urgency – all these things happen when you take too much money in. In a lean model, you’re in a race, you’re worried, you’re not there yet. You’re at a constant level of anxiety, and it makes you more agile and responsive – a lot of good things happen.”
The second change comes from the globalization of technology markets made possible by the Internet, as Bullpen’s Duncan Davidson explains: “You’re not just selling to a few companies in the U.S.; you’re selling to a huge consumer marketplace. So a franchise can evolve extraordinarily quickly. Bill Gates once called this the ‘friction-free economy,’ and it’s pretty damn close. This explains why a company like Zynga or Groupon or Instagram can go from nowhere to a very valuable company, extraordinarily quickly, much more rapidly than ever before. The changes are: It’s very cheap to do things, given modern technologies, and the global market makes a potential win absolutely huge – faster, bigger than we ever imagined before.”
(NOTE: For more of Duncan Davidson’s insights – along with those of five other top-tier VCs – download Scott Fulton’s exclusive 14-page report: “Growing Your Business In The Modern Economy: 6 VCs Weigh In.”)
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