Month: October 2011

The Second VC Round – A True Test of Scalability

| tomnora

The Second Round, or “B Round”, or “Follow On” round can be the achilles heel of a startup. It requires much more than a first injection of funding especially in the current healthy seed and angel investing environment.

No doubt the first round of external funding for a startup is usually critical to a startup as it can be the difference between continuing your startup or shutting it down. But it’s a different milestone than the second round of funding. The first venture round is often based on an idea, past successes, a business plan, or a market hunch. The decision to invest is based on an educated guess by investors. Often the investors are family and friends or angel investors, who have less sophisticated standards for measuring the likely success than top tier VCs.

The current phenomenon of Internet multi-millionaires recycling their money back into the startup markets is creating “super” angels like Ron Conway. For them, a $500,000 seed investment requires very little due diligence or proof of long term scalability. They sometimes invest in multiple companies within one meeting. There’s a slang term “spray & pray” describing this type of investing – put a little bit into a lot of startups and you’ll win by statistical odds.

The second round, however, is based more on cold hard facts. Is this company catching on? Have they built the foundation for the next 3-5 years? Does their product line hit the mark? Is it positioned correctly? What are the follow on products? Where is the market going?

The second round is often for some or all of the following – corporate growth, go to market, turn the prototype into a robust offering, marketing costs, or to hire a sales force. It’s no longer based on a hunch, unless the company is in trouble and needs money to finish what the first round started. (This problem often leads to a lowered valuation or “down round”. Not a great scenario.) If the company is doing well, the second round is easier to acquire. Facebook is a great example of this. They’ve had 9-12 rounds, depending on how you count, with investors still begging to get in. Their 2nd/3rd rounds were bigger than most startups ever see.

Facebook Funding Seed, A, B:

Total $2.34B
Angel, 9/04 19
Peter Thiel
Reid Hoffman		 $500k
Series A, 5/05 20
Accel Partners
Mark Pincus
Reid Hoffman		 $12.7M
Series B, 4/06 21
Greylock Partners
Meritech Capital Partners
Founders Fund		 $27.5M
source: Crunchbase
The second round  can also be a mezzanine, or pre-IPO round, or even the IPO itself. In one scenario in my career I was with a company that had taken only one round of equity financing. With rapidly increasing revenues, we felt we had enough momentum and cash to execute an IPO without any more funding, thereby retaining more equity and control of our company, but we were getting a lot of pressure to take on another round. Our current venture partners felt we needed some insurance money in case of a downturn, more marketing money, a bigger team of investors, and a new logo. They turned out to be right about everything but the new logo.
Most startups that get a first round never make it to the second round. In todays soft-bubble economy this is more true than ever since so many first rounds are happening. Some don’t even want a second round. But the second round is truly a measure of scalability for your startup. Please feel free to contact me by DM to discuss more.  @tomnora or @cowlow

13 Things You Must Do Every Week As A Startup CEO

| tomnora

I like this list – it’s from betashop, it’s from Jason Goldberg (http://fab.com). He hits on many soecific tasks centered around “stay awake” and “stay humble” themes.

http://j.mp/oSFgUQ

My additions:

_Quash all politics – put the people who oppose each other in a room together and make them work it out
_Measure yourself weekly
_Randomly call a customer
_Shut Up – stop talking/texting for a day or a few hours, you’ll be amazed what happens
_Take a walk in a park – Central Park? Golden Gate Park? Stanford Campus? Griffith Park? Les Tulleries?

It’s all about Revenue – Continuously Scaling Revenue

| tomnora

This is an obvious one, but a point too many startups forget or ignore in early stages.

The purpose of a for profit business is to generate revenue, period. Avoiding this fact and/or not planning on it, focusing on it In most cases, the goal is to increase revenues continuously over time, i.e. scalability. It’s even more desirable to never have a dip in revenues, but this rarely happens.

There are tons of articles about many things about the startup world these days. Equity discussions, how to pitch, what’s hot, success and failure stories, etc. But very few articles about how to begin, grow and sustain revenues, what that process looks like or what to do when they stall.

There are also almost as many startups as the number of people I meet these days. Everyone has their own startup, which is usually little more than a reserved url, a $10 commitment and an idea. But can they produce revenues, increasing revenues over time profitable revenues? Can they create jobs? Stay in business for 10 years?

Google just announced their most recent quarter numbers: 26% increase in revenue year to year to $9.7 Billion. Now that’s a revenue focused company, pretty incredible for a 13 year old company to be growing that fast in a bad economy. Google’s original business plan didn’t even include their current main source of revenue – advertising. But they adapted quickly and haven’t looked back yet. Their admirable amount of revenue allows them to do so many powerful things their competitors can’t as well as contribute enormously to philanthropic causes. Not every startup will be a Google of course, but if you figure out how to continuously scale revenue or even maintain zero growth revenue, you can provide viable employment, profitability, benefits and even give back to society a bit.

So how do you do it? There are several components that must work together like a system that incorporate your products, your values, your people, outside advisors, investors and more. Having a great idea of course is key, but that alone won’t sustain you. This is where many startups trick themselves. “We have an amazing idea, so we will succeed. You must monetize properly, plan for hiccups, see the future. Most of all, Revenue has to be nurtured and protected  priority #1.

I’m happy to discuss this more, just send me a DM at @tomnora or post on this blog.

My Message to Apple Send your own at rememberingsteve@apple.com

| tomnora

i will always miss his guidance.

Only a year older than me, I have imagined his answers many, many times over the years regarding my career, design, personal peace, style, etc., etc.

Met him twice – once in 1977 when I was a NASA intern in Mountain View, then in 1991 when I did a NeXT disti deal with him.

The first time I had no idea who he was. He and Woz had a storefront on El Camino and he showed us his prototype in a beat up suitcase. I had no idea…

Then in 1991 we met to sell NeXT systems to the Navy – he arrived in a baggy black sweater with a hole in it and jeans, in a black 911. Even though NeXT wasn’t taking off, he was a rockstar. We all had on suits, drove sedans.

Apple will continue to thrive, incorporating his 30+ years of influence and accepting the mantle now that he’s gone.

I will miss his soul. Long live Steve.

Tom Nora