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


Are you ready?


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


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?


Hunting the Beast - Looking for Investors

Understand what you’re up against
- Investment climate
- Angel investors
- VC dynamics
- Time
- What is a good investment?


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


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.


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.


First 5 things VCs are looking for ?

Domain expertise
Management strength
History of collaboration and success
Growing market
Unique differentiation


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
achieve VC funding


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


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!


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


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


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?


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


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.


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.


My advice to you


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.


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.


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.


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.


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.


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.


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.


Buckle up and enjoy the ride.


Thank you.

Idris Mootee


Web 2.0 Start-Up Field Guide - Idris Mootee

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