Web 2.0 Start-Up Field Guide - Idris Mootee

The Web 2.0 Entrepreneur A Start-Up Field Guide Idris Mootee May 2007 www.mootee.typepad.com

What’s a business? Money (Fuel) + Commitment (Time and Effort) + Knowledge (IP) = Wealth Creation www.mootee.typepad.com

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 business The plan is to sell to Google or Yahoo in 24 months www.mootee.typepad.com

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

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

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

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

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

First 5 things VCs are looking for ? Domain expertise Management strength History of collaboration and success Growing market Unique differentiation www.mootee.typepad.com

Next 5 things VC will be looking at? Clear business model Personality Short hiring cycle Marketing know-how Commitment www.mootee.typepad.com

Angel Investments –57% of companies with angel investment achieve VC funding –10% of companies with no angels achieve VC funding www.mootee.typepad.com

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

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

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

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

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

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

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

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

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, 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

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

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

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

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

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

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

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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