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The Web 2.0 Entrepreneur
A Start-Up Field Guide


                         Idris Mootee

May 2007


                      ...
What’s a business?




Money (Fuel) +
Commitment (Time and Effort)
+ Knowledge (IP)
= Wealth Creation


                  ...
Are you ready?




                 www.mootee.typepad.com
Four deadly sins of web 2.0 Entrepreneurship




Not enough capital
Not filling an unmet need
Believing a feature is a bus...
Question to ask yourself




Many web 2.0 start-ups were acquired by
Google and Yahoo in the past 18 months
were only in t...
Hunting the Beast - Looking for Investors




Understand what you’re up against
- Investment climate
- Angel investors
- V...
The Investment Continuum



        High     Founder, friends
                    and family

                            ...
Angel Financing




- The angel usually invests in the $100,000
  - $250,000 range and usually gets around
  15-20% of the...
Venture Capital Financing




- Founders typically give the venture
  capitalist 20% - 40% of the shares in
  exchange for...
First 5 things VCs are looking for ?




Domain expertise
Management strength
History of collaboration and success
Growing...
Next 5 things VC will be looking at?




Clear business model
Personality
Short hiring cycle
Marketing know-how
Commitment...
Angel Investments




–57% of companies with angel
 investment achieve VC funding
–10% of companies with no angels
 achiev...
Angel Quirks




Most Trusted Deal         Least Trusted
Referrers                 Referrers
Friends and colleagues    Att...
Venture Capital Drivers

   Fund Providers          Venture Capital Firms      Portfolio Companies

        Money         ...
VC Quirks




80% of VCs are financial people with limited
building / operating experience
– Tendency to flip companies or...
Decision Criteria for Investors


                                   Rank by    Rank by
                                  ...
Business Model and Strategy



 Does the story make sense?
 – Who is the customer?
 – How do you create customer value?
 –...
Price your valuation accordingly?




If you have this                    Add to Company’s value
Sound idea               ...
Best pre-VC investment structure




1/ Convertible Debt : This is the easier approach of the two.
Investment is in the fo...
Best pre-VC investment structure



2/ Preferred Equity : This is also known as a “light
Series A” – it’s preferred stock ...
My advice to you




                   www.mootee.typepad.com
Advice to you




It’s not the destination, it’s the journey. The
fun is in the doing.
Once you’ve reached the destination...
Advice to you




You’ll spend countless hours on a business
plan that most investors will not bother
reading. To capture ...
Advice to you




Never forecast with a ruler or build a
business using excel. Nothing in business
moves in a straight lin...
Advice to you




It’s all about people. Hire people who have
little regard for the status quo and who are
not afraid of i...
Advice to you




Retain as much equity in your company as
possible, particularly in the early stages.
You will need them ...
Advice to you




Business is never predictable. Get as
much financing as you can the first time.
Money may not be availab...
Advice to you




Don’t rely on any research about web 2.0.
There’s no best practices either. It is better
to have no rese...
Buckle up and enjoy the ride.




                      www.mootee.typepad.com
Thank you.



             Idris Mootee
             www.mootee.typepad.com




                   www.mootee.typepad.com
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Web 2.0 Start-Up Field Guide - Idris Mootee

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This talks to how to getrVC funding and many other issues typically face by the entrepreneur.

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Transcript of "Web 2.0 Start-Up Field Guide - Idris Mootee"

  1. 1. The Web 2.0 Entrepreneur A Start-Up Field Guide Idris Mootee May 2007 www.mootee.typepad.com
  2. 2. What’s a business? Money (Fuel) + Commitment (Time and Effort) + Knowledge (IP) = Wealth Creation www.mootee.typepad.com
  3. 3. Are you ready? www.mootee.typepad.com
  4. 4. Four deadly sins of web 2.0 Entrepreneurship Not enough capital Not filling an unmet need Believing a feature is a business The plan is to sell to Google or Yahoo in 24 months www.mootee.typepad.com
  5. 5. Question to ask yourself Many web 2.0 start-ups were acquired by Google and Yahoo in the past 18 months were only in the prototype stage and they ended up getting bought before the moment of truth came. Is that part of your plan? www.mootee.typepad.com
  6. 6. Hunting the Beast - Looking for Investors Understand what you’re up against - Investment climate - Angel investors - VC dynamics - Time - What is a good investment? www.mootee.typepad.com
  7. 7. The Investment Continuum High Founder, friends and family Business Angels Level of Venture Capitalists Investment Risk Corporate VC Assumed by Investor Equity Markets Commercial banks Low Seed Start-Up Early Growth Established Angel market addresses the $500K investment gap between love money and serious money www.mootee.typepad.com
  8. 8. Angel Financing - The angel usually invests in the $100,000 - $250,000 range and usually gets around 15-20% of the shares of the new company. - The angel tries to help the new company achieve enough growth to attract the attention of other investors. www.mootee.typepad.com
  9. 9. Venture Capital Financing - Founders typically give the venture capitalist 20% - 40% of the shares in exchange for $2 million to $8 million. - The terms depend on how promising the company is, how good the management team is, and how many other venture capital firms are competing for the deal. www.mootee.typepad.com
  10. 10. First 5 things VCs are looking for ? Domain expertise Management strength History of collaboration and success Growing market Unique differentiation www.mootee.typepad.com
  11. 11. Next 5 things VC will be looking at? Clear business model Personality Short hiring cycle Marketing know-how Commitment www.mootee.typepad.com
  12. 12. Angel Investments –57% of companies with angel investment achieve VC funding –10% of companies with no angels achieve VC funding www.mootee.typepad.com
  13. 13. Angel Quirks Most Trusted Deal Least Trusted Referrers Referrers Friends and colleagues Attorneys Business associates and Accountants strategy consultants Lead investors in a Bankers and syndicate gatekeepers www.mootee.typepad.com
  14. 14. Venture Capital Drivers Fund Providers Venture Capital Firms Portfolio Companies Money Money 2.5% Annual Fee Limited Partners General Partners Pension Funds 20% capital gains Individuals Corporations Ins Companies Entrepreneurs Foreign Sources Endowments IPOs and Mergers Equity 80% of capital gains + principal Supplier Customer Management (Cost of Goods Sold) (Revenue to VC firms) (SG&A) Venture Capital is a money distribution business where entrepreneurs compete for “shelf space” and where only 1 in 100 companies get funded! www.mootee.typepad.com
  15. 15. VC Quirks 80% of VCs are financial people with limited building / operating experience – Tendency to flip companies or push them to liquidity too soon 15% of VCs have the experiences and scars to help you build a business – Can see the bumps in the road before you do and can help avoid a crash www.mootee.typepad.com
  16. 16. Decision Criteria for Investors Rank by Rank by Angels VC Enthusiasm of entrepreneur 1 1 Trustworthiness of entrepreneur 2 2 Sales potential of product 3 6 Expertise of entrepreneur 4 5 Liked entrepreneur upon meeting 5 7 Growth potential of market 6 3 Quality of product 7 10 Perceived investor financial 8 4 rewards Niche market 9 16 Track record of entrepreneur 10 11 www.mootee.typepad.com
  17. 17. Business Model and Strategy Does the story make sense? – Who is the customer? – How do you create customer value? – How does the business make money? Do the numbers add up? – Is there a big enough available market? – Do the pieces of the business fit together? – Do we take into consideration of any potential price war? www.mootee.typepad.com
  18. 18. Price your valuation accordingly? If you have this Add to Company’s value Sound idea $1 million Prototype $1 million Quality management team $1 million to $2 million Quality board $1 million Product rollout or sales $1 million Total potential value: $1 million to $6 million www.mootee.typepad.com
  19. 19. Best pre-VC investment structure 1/ Convertible Debt : This is the easier approach of the two. Investment is in the form of a promissory note that converts into equity on the terms of a “qualified financing” The note will either convert at a discount to the price of the qualified financing (usually in the 20% – 40% range. This note is a real promissory note with the conversion and redemption characteristics clearly defined to protect both the investors and the entrepreneurs from any misunderstandings. * qualified financing typically is defined by having a minimum amount – say $1m of total investment. www.mootee.typepad.com
  20. 20. Best pre-VC investment structure 2/ Preferred Equity : This is also known as a “light Series A” – it’s preferred stock that is similar to that a VC will get, but usually with lighter terms due to the relatively low valuation typically associated with it. For a very new company, a $500k investment can receive between 25% and 50% of the equity in the company and, as a result, many terms associated with a typical VC deal are overkill. www.mootee.typepad.com
  21. 21. My advice to you www.mootee.typepad.com
  22. 22. Advice to you It’s not the destination, it’s the journey. The fun is in the doing. Once you’ve reached the destination, you will be both happy and depressed, like after beating a great video game and now you have nothing to look forward to. www.mootee.typepad.com
  23. 23. Advice to you You’ll spend countless hours on a business plan that most investors will not bother reading. To capture their attention, start with an user story and a truly unique and profitable opportunities. www.mootee.typepad.com
  24. 24. Advice to you Never forecast with a ruler or build a business using excel. Nothing in business moves in a straight line and spreadsheets give you a false sense of certainty. www.mootee.typepad.com
  25. 25. Advice to you It’s all about people. Hire people who have little regard for the status quo and who are not afraid of innovating. Look for ambition, intelligence and self-motivation. www.mootee.typepad.com
  26. 26. Advice to you Retain as much equity in your company as possible, particularly in the early stages. You will need them to attract talents for the next stage. www.mootee.typepad.com
  27. 27. Advice to you Business is never predictable. Get as much financing as you can the first time. Money may not be available when you need it. www.mootee.typepad.com
  28. 28. Advice to you Don’t rely on any research about web 2.0. There’s no best practices either. It is better to have no research than bad research. Trust your gut to find the right directions. www.mootee.typepad.com
  29. 29. Buckle up and enjoy the ride. www.mootee.typepad.com
  30. 30. Thank you. Idris Mootee www.mootee.typepad.com www.mootee.typepad.com

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