Startup financing is a really broad category. Critical at the earliest stages is understanding whether or not there’s an intent to seek equity financing – at all. Many “lifestyle” startups work just fine from bootstrap to revenue and exit (not neces…

At the top of the list are: – Stefan Glaenzer, ex-QXL/ricardo.de/Last.fm, Eileen Burbridge, ex-Skype & Robert Dighero, ex-QXL (investing as a group) – Robin Klein, now Seed Index, formerly TAG – Klaus Hommels, investor in Spotify, Skype, etc, now runni…

Thanks for the great blog and the valuable information you provide to all the entrepreneurs without asking for anything back.

How can I find a mentor like you before starting to send my Business plan to all the VCs and BAs? If someone doesn’t have a friend with your kind of know how, and at the same time doesn’t feel ready to contact investors how can he or she fill that gap?

Thanks a lot!

Sebastian

a) does a dedicated seed-fund charge management fees to its investors? if not, how does the fund cover opex? For example, in the VC model, GPS charge management fees to LPs and get paid carried interest;
b) How and when would “seed-lps” get paid?
c) What kind of support can you offer entrepreneurs, beyond coaching/advising/contacts?
d) What would the typical ownership stake be for a seed investor (I know that y-combinator takes a very small stake for a very^5 small investment); and
e) how many companies you need to invest in to start generating portfolio effects?

Would love to get your take on these, if you have time of course.

Thanks!
Enrique
617-780-5465

I recently met an entrepreneur who was raising money for his startup. Six months prior, he had raised seed money (…

Please Note: I would still recommend that anyone given the opportunity to participate in TechStars seriously consider doing so — just know what you are getting into.

Furthermore, as an entrepreneur, I think it is important to realize that there are several different investment strategies, which you can choose to align yourself with. For instance, the strategy that Basil discusses in his book is not about “swinging for the fences” so much as winning the game by consistently hitting singles and doubles. It all depends on your goal as an entrepreneur.

Also, I ultimately agree that VCs are generally a good thing for entrepreneurs and society at large. But again, culture needs (and will) evolve with the model — especially as business continues to become more transparent via social media.

Last but not least, I was mistaken, the TechStars forum is publicly viewable, you just have to be a member to post: http://startup.techstars.org/discussion/14/The-Problem-With-Taking-Seed-Money-From-Big-VCs

I think VCs are generally a good thing for entrepreneurs and society at large, although there are certainly abuses (but those pale in comparison to other areas of finance such as later stage private equity and hedge funds). As an entrepreneur you just need to know what you are getting in for, including the fact that you now have to “swing for the fences.”

I participated in TechStars in 2007. The first question afterward from nearly every investor was: “is Brad investing?” (Brad Feld is a VC and co-founder of TechStars) However, I also believe that this “negative signal” (or “Brad effect”) created by VCs’ involvement in seed stage mentor-driven investment programs (such as TechStars) is only half of the story.

Basil Peters, a member of the Bellingham Angel Group, wrote a great book titled Early Exits, Exit Strategies for Entrepreneurs & Angel Investors (But Maybe Not Venture Capitalists). I highly recommend that every startup founder READ THIS BOOK BEFORE TAKING A CENT OF FINANCING. Basil puts forth that the current VC model is broken. He cites shorter innovation cycles & the fact that tech startups do not require the intense amount of capital that they once did as two reasons that the old system is breaking down. Furthermore, Basil identifies an inherit conflict of interest between VCs and startup founders; stating that VCs have a tendency to block exits that would be completely acceptable to the founders & angel investors in the hopes of “hitting it out of the park”. Unfortunately, although this strategy works out in the end for the VC, several viable business are effectively bled to death in the process.

To a certain extent, it could be postulated that mentor-driven seed stage investment programs are the VC model’s adapted response to shorter innovation cycles & the requirement for less cash. Again, as a strategy, this makes very good business sense. However, there is perhaps an even more disingenuous conflict of interest that occurs within the adapted model when such a business is outwardly constructed as a mentorship. I say this, because the second you label it as such, it inherently possesses a grossly different mandate, which IMHO can’t socially afford the traditionally accepted “trail of blood”. In other words the culture needs to evolve with the model.

Having stated this, I would like to also say that my experience participating in TechStars was overwhelmingly positive.

Jeff – Agree that 2 VCs make the situation a little bit better. You get some game theory working to your favor. I would add that it’s important that the VCs be of somewhat equal stature (and equal investment amounts, but they usually insist on that). If you have tier 2 firm co-investing with Sequoia and Sequoia doesn’t follow on, it’ll look bad.

In terms of pre-negotiating the Series A that is triggered with milestones, that sounds a lot like tranching, which I am against for a lot of reasons (it deserves a whole blog post…), but mainly at the early stages the direction often changes and so fixing the milestones can encourage the entrepreneur to manage to the investors instead of what’s best for the business.

That said, agree that every startup should have milestones, regardless of financing conditions – it’s just good business practice.

Sameer – I think there are some cases where you do in fact need capital at the very beginning. It’s true that many internet businesses today can be bootstrapped, but other kinds of startups including more tech heavy internet/software, or for sure hardware, biotech, etc might be better off taking some (non-VC) seed money.

How would you ideally fund your startup?