It took me quite a while to let go of the esteem I used to accord to product development.

The painful truth that engineers must realise is that without traction, your product is basically nothing.

On a +ve note, by developing your customer base in parallel with your product , you can kill two birds with one stone. In other words, startups need to “unstealth” themselves.

It took me quite a while to let go of the esteem I used to accord to product development.

The painful truth that engineers must realise is that without traction, your product is basically nothing.

On a +ve note, by developing your customer base in parallel with your product , you can kill two birds with one stone. In other words, startups need to “unstealth” themselves.

Although it **seems** counter-intuitive — after all, if you can't build the product, then that is automatic and absolute FAIL — this is a hard pill to swallow, especially if your role in a startup makes you directly responsible for getting the product built.

When you think about 'Chandler' (Millions of dollars and many years spent without even coming close to building the product they set out to build) and 'Duke Nukem Forever' (12 years and many more $ Millions with no product ever materializing) it just seems strange that successfully getting the product built would not count for much, doesn't it?

TJL

We don't need to pay consultants like Chris Brogan because we have Ken. We are hoping Chris, another local Bostonian, will evangelize our product as well (or at least mention it) on this blog for free. Given out Ford Focuses and sending people on missions is simply foolish and neither Ken nor I would never approve of such an expense. Reminds me of when my former employer Akibia gave away a Porsche Boxster and then spent $100K on a street party at a Siebel conference and then ended up laying off 30 billable consultants a couple of months later because their $150K showed literally zero ROI.

Social media marketing can either cost money if choose to…or you can do it for free with excellent results, as we have.

Chris Dixon's blog post is about Seed funding, not about Series A, B, or C rounds of funding. Trust me, when SocialGrow has a marketing budget for Ken AND a publicly released product, look out for what he will do then marketing-wise. But he's done an awfully good job marketing for us with zero budget and zero finished product.

-Cory Levy

You can say, “Ford is doing a lot with social media”, but having Scott Monty onboard I'm sure costs a few dollars, and handing out 100 Ford Focuses and flying people around the world and sending them on 'missions' also cost a large amount of money. Definitely NOT something a company can pull off with a zero dollar budget.

I agree that you don't need to do big name advertising, but social media marketing doesn't sell everything for free.

I would be interested in seeing a post from you on what Angel and Seed funds were used for during the first Internet boom and what they are used for now.

I agree that “accretive milestones” differ for each company and what they need to achieve to create traction.

There are two main differences I see about startups today needing seed funding to achieve traction versus last decade:
1. Technology for startups used to cost money. Today it doesn't have to. The increased usage of free technology from both open source platforms and from Microsoft via their BizSpark Startup program (http://microsoft.com/bizspark) on top of cloud hosting make the technology pretty much free. We are launching Alpha to over 100 users on February 1st and our monthly operating costs are around $34 per month currently.
2. Creating brand awareness used to cost money. Today social media marketing is free. It was expensive to advertise in Red Herring, but everyone did it. Today startups can create brand awareness around their company and product through being talked about in well-followed blogs, their own blog, Twitter, webinars, SlideShare, YouTube, and taking advantage of PR opportunities through HARO, etc. Having Microsoft talk about you and blog about you if you are part of their BizSpark program also helps tremendously. During the Microsoft PDC 09, SocialGrow had a press release done on the Microsoft site by Waggener Edstrom Worldwide on Tuesday, was named Startup of the Day worldwide on Wednesday, and had the founders video interview published on Microsoft Online Channel 9 on Thursday.

With the cost to create and run a web-based startup nearly zero, the amount of seed funding required should also dramatically decrease as well…if not start approaching zero at some point in the future as well.

Your thoughts?

Marsh Sutherland
President | Co-Founder
SocialGrow™
http://socialgrow.com
@socialgrow | @marshsutherland

Similarly, should the amount being raised in all rounds be determined by what it will take to reach certain milestones plus a fudge factor? Or, is there a stage at which raising money becomes about more than hitting milestones and increasing your valuation for a next round?

Most startups have two key types of risk: technical (to varying degrees) and market (all of them) – and the founders have different levels of control over each. In a nutshell, technical risk should be entirely under the control of the founders, whereas market risk is much harder to overcome.

In consequence, overcoming technical risk may represent a major milestone for the engineers – but from an investment perspective it is basically meaningless. It follows that achieving a technical milestone (eg a public launch) will not trigger a valuation uptick.

So far, so obvious. But things get interesting for projects with a large tech component and a long development cycle prior to launch. On this basis, a standard 18 month runway is useless, because only technical milestones will be reached in this timespan, leaving no scope for valuation upside.

In these circumstances, a longer runway makes sense. The founders should be willing to exchange some degree of valuation risk (dilution) for funding visibility.

The subsequent round (and with it a new valuation) should always come when there is a decent level of market feedback.

We don't have any funding yet- so presumably we'd be looking for some level of angel funding/seed funding. I know that many micro funding rounds like yCombinator or TechStars Boston are sub 30K rounds, but I'm unsure of the size of most angel/seed rounds for tech companies.

Clearly I have more research to do.

I'm fond of minimizing catastrophic mistakes.

If you can get revenues before initial funding, do it. Potentially puts you in a much stronger negotiating position.

I'm training myself to be aware of the possibility that any investment round could be the final round. From then on you could be “on your own” unless the investor forces a liquidation (5 or so years).

1) So get enough to to build user traction if you're a consumer internet biz, build revenues if you're building ads, etc.

2) Don't get too much because it dissuades follow on rounds because dilution was too great in the first round

What about build something users want, and then generate some revenues to help channel into organic growth? Seek external funded as needed to step on the gas to accelerate through portions of the growth/building curve. That's my position (it may be sub-optimal).

We're raising an early round ($500K), but recently got interest from a VC fund with $2.5B in assets and around $500M ready to deploy and they like our approach/market. Cool to have their interest, but if their minimum investment is around $8M, what is your recommendation for handling this situation?

I know we don't want that investment now, but we may in the future (Series B etc). So is it just a matter of keeping in touch in the meantime?

For a consumer internet company, in the current environment, what type of traction (e.g., user growth, engagement, etc) would warrant a $3M pre money vs $6M pre money? Does it take proof of a business model to get the pre money beyond a $4M pre money valuation?