Sweat Equity as Alternative Funding Model

In an earlier blog post I argued that the funding model for software startups is fundamentally changing. This is hardly an argument and more of an observation of the expense side going down for IT startups and legacy funds largely still caught in their bubble investment models.

There is a LOT of talk in the entrepreneur and VC community about the survivability of this model especially regarding the ability to raise more funds in the coming year. And with that, how many VC's will go into hibernation, change models (i.e. lower raise from largely non-institutional money focusing on companies requiring less capital or switch focus to industries with larger capital requirements), or quietly close their doors.

Seth Levine has an interesting article firing back at the Business Week article on How Venture Capital Lost it's Way. Here's another from Fred Wilson earlier this year on the math of venture capital. And Above the Crowd with his post on Asset Allocation and Venture Capital.

In the face of these facts the early stage software and software as a service (SaaS) early stage ecosystem remains healthy. Companies are figuring out how to generate cash flow earlier, get by with less and raise less, and in increasing numbers are eschewing venture capital paths altogether. Angels have stepped in to fill a larger role in seed stage investment but so too have the entrepreneurs and developer communities.

Contract developers are a lot like angel investors with the exception that they're throwing development skills instead of money in alongside the founders. Their "yes/no" analysis is a mix of knowledge of the founders (friends), attractiveness of the problem/solution (skills), and recognition of the market (money - or Net Present Value - NPV). There's a mix of people who've been through the bubble(s), heavy in skills and slightly jaded on the NPV calc. And there are the people who haven't been through the bubble, are anxious to make their mark and want to believe but are much more pragmatic than similar folks in the heady bubble days.

Both of these groups are willing to work for some amount of equity, and depending on the friendship card and personal cash flow needs, some requirement of cash. After all, food doesn't find its way to the table on it's own. This enables you to get your product built without having to hire someone full time and at a discounted rate. I must admit that I've put in a hell of a lot of time on my recent project to get it off the ground doing a large chunk of the development, but I've also managed to get the entire beta launched in the very low five figure range.

As a side note, I think it's infinitely useful to go back and read 37 Signals Getting Real

I've put together a few of these agreements and they're all fairly similar. Please add a comment if you would like a sample version of one and I'll send it to you. And if your needs are greater, I'll refer you to friend and former Cooley attorney Michael Stack who has helped with some of these agreements in the past.

The mechanism is essentially this:

• Agree upon a discounted rate per hour that will be paid out in cash
• Agree upon a bonus compensation that involves granting a set number of shares per hour that feels fair. You might be able to back into this number by giving a nod to what the company might be worth if someone priced a round. So let's say you think the company could be worth $1M pre-money and there are $1M shares outstanding. After the discounted rate, the developer is willing to take in a bonus of 50 shares per hour worked.
  
• Create an agreement that contains both the discounted rate, bonus stock rate, and expectations, ceilings on hours, IP protection.
  
• 1099 the contractor for the discounted rate plus the bonus stock at the current stock value (which at a very early stage could be as low as .01/share)
• Downside to be aware of is a larger pool of shareholders in your company and some additional dilution.
  

First Things First - Creating the Pitch Deck

At the very beginning stages of a company, even if that company is merely an idea jotted on a coffee stained napkin, the first real step to moving forward is to create a pitch deck. The long and short of company creation, fund raising, and selling is that you need a way to explain what you do in simple straightforward language. This will obviously take various forms depending on the audience. Get started with an investor presentation. Taking the perspective of an investor will force you to answer the hard questions of why someone else would believe in your ingenious world-changing idea enough to give you their money.

Guy Kawasaki broke this exercise out into 10 slides in his book "The Art of the Start" published back in 2001. His 10/20/30 rule holds up.

The people you are pitching to have limited attention spans and have heard 100 business plans in the last 60 days. Guys advice on the 10 slides follow. They don't have to strictly follow this order but the order is good. The biggest one I would consider swapping is "Team." If your team is a very strong component (and it is a primary reason people will invest) then stick it up front, perhaps right after your solution slide.

Ten slides. Ten is the optimal number of slides in a PowerPoint presentation because a normal human being cannot comprehend more than ten concepts in a meeting—and venture capitalists are very normal. (The only difference between you and venture capitalist is that he is getting paid to gamble with someone else’s money). If you must use more than ten slides to explain your business, you probably don’t have a business. The ten topics that a venture capitalist cares about are:

1. Problem
2. Your solution
3. Business model
4. Underlying magic/technology
5. Marketing and sales
6. Competition
7. Team
8. Projections and milestones
9. Status and timeline
10. Summary and call to action

Read more: http://blog.guykawasaki.com/2005/12/the_102030_rule.html#ixzz0XW8WIxS7

After you've collected your ideas, pitch it. Pitch it to your close business mentors and associates, pitch it to your girlfriend, spouse, people in your target market. Pitch, rinse, and repeat.

And when you're ready to take the presentation to the next level to put a finer point on it, check out Presentation Zen. Thanks Catherine for turning me onto it.

I ran my most recent Twitter cloud on wordle via Tweetstats. Looks like I'm mostly running, watching, listening, and meeting.

I believe the habit and purpose of tweeting are changing, or at least changing among the people with whom I tweet. Tweeting is useful as either information dissemination or entertainment. Tweets of the mundane sort are becoming less common in favor of purposeful tweets with an audience in mind. While I still do tweet about the mundane during times when I feel like reaching out and letting the world know I'm alive and usually out of some sense of social insecurity, my other tweets tend to pass on information that I think will somehow be useful. These fall into the categories of: some interesting bit of news happening in the world, a funny encounter or OH, or marking some personal milestone that I think people who know me best will appreciate.

I'm still trying to figure out the best way to interact with all of you tweeps out there, so let me know. How would you categorize why you follow someone?

The New Deal

I've been out fundraising for my new company, Roundpegg for about five weeks now. I've met with a multitude of venture capitalists, angels, advisors, prospects, customers, and just about anyone with a pulse. A monster meeting schedule is par for the course at this point in the company's life. You constantly walk the line of meeting schedules vs. sufficient productivity to get the product built, demonstrable, deployable. Also par for the course has been VC response. We've done one west coast swing with Roundpegg and although we had a lot of interest, with comments like, "huge market", "it's unique; I haven't seen any other deals come through that are like it", "perfect timing for the market with this kind of company", the week after the VC partner meeting we've gotten the litany of soft no's typical of this stage.

• "You're too early stage. Keep us up to date."
• "If you were in the Bay Area we'd be interested. Have you thought about moving?"
• "Do you have a lead investor in Colorado? Is Foundry investing in you?"

These are radar meetings. Radar meetings are intended to get you onto the radar of the VC community, making them aware of you, and often resulting in a number of offshoot meetings with potential angel investors, partners, prospects, etc. It's always good to have the meetings early and not ask for the money. Ask for advice, ask for contacts, ask what the VC partner thinks about the market you're going into and whether they've seen deal flow recently in this space.

Something has changed in the process though. You can feel it at these meetings and in the attitudes of other entrepreneurs. With the majority of venture funds' portfolio companies still feeling the effects of the recession, venture funds have moved to the right--that is, to later stage investments. Any venture funds still in the early-stage game seem to be speculating on the hyped areas of social media infrastructure and applications, or on clean technology.

There seems to be an increasing gap between the very early friend and family stage of funding, and doing a professional seed round of funding. The Mint.com story illustrated this point further in a post by Christine.net after they were acquired recently by Intuit.

The straight shot: Why should you raise money, and how much?

• Step 1: When you're ready with an Idea: Raise $100K from friends and family, and use it to build a prototype.
• Step 2: Once the prototype is done: Raise < $1M in seed capital, and get into market with an alpha launch.
• Step 3: After that initial launch has traction: Raise $5-10M, and use it to prove/scale the model.

So while the venture fund community has continued to move to the right (from a business stage perspective) the entrepreneur community has moved to the left from a cost perspective. It now takes less than for forever ago to get a software startup off the ground. In roundpegg.com we've spent less than $10K in total over six months to incorporate, build the first fully functioning version of the technology, host the site, and design and build a website for the company. While this is not sustainable and now with customers going live we need a couple of more people the overall cost of getting the company between these early milestones is incredibly low.

So where does this leave us on the investment side? Close to heaven. The groups stepping into the gaping void are angels. Angels typically invest in these early rounds and may even participate in the friends and family stage of the investment. In this environment they are also capable (given two or more with deep pockets) of taking a SaaS (software as a service) oriented company all the way to profitability and skip the venture funding process entirely. There is a huge opportunity for super angels, angel consortiums, or seed stage venture funds to claim this middle ground of professional seed stage investment.

Remember that in a time of disruption opportunities abound.

Ten Tips for Successful Entrepreneurs

Ok, I've become lazy in my posts but this is an excellent bit that was forwarded to me by my new friend Jana Matthews. For those of you who know Jana, you know what a smart, passionate, and caring person she is and I value her input on the startup game. More posts to come on that peculiar rider and vehicle, the entrepreneur and startup. This one offers good insights that you can use immediately to evaluate behavior in your own startup and the threshold to post was so low that it offered a great way to get back in the game.

I just ran across some notes from a session where Guy Kawasaki and I spoke in Cambridge, England on 9/11/2001! Think about them in the context of your own company.

Ten Tips for Successful Entrepreneurs

1. Jump curves or create the next curve. Keep moving.
2. “Don’t worry; be crappy” In other words, ship, test, and keep improving. It’s OK if you’re 10X better than what is. You don’t need to be 100X better, e.g., bad toilet paper is still a lot better than crumpled leaves.
3. “Churn baby churn.” Do versions 1.0, 2.0 3.0, X.0. Do R&D and continual product improvement
4. Break down barriers – enable people to test drive your product or service sooner, rather than later
5. Evangelize – don’t just sell. Show that what you have to offer is in their “best interest “. Show how it will make the world a “better place”. Capture their heart and head. It’s better to legitimize the revolution than to win the battle. Better to legitimize the web than to win market share on the internet.
6. Let 1000 flowers bloom. Think of the many applications of your concept
7. Eat like a bird; poop like an elephant. Birds eat 50% of their weight every day. Be a voracious eater of information
8. Think digital; act analog
9. Never ask people (consumers or customers) to do what you would not do yourself
10. Don’t let the bozos grind you down. Don’t give up. [“ Bozocity” often happens when someone has been successful in one curve, gets stuck, and finds it impossible to move to the next curve (or find value in your new product or idea)].

I hope you find these Ten Tips useful.
Best,
Jana
_______________
Jana B. Matthews
Chief Executive Officer
The Jana Matthews Group
www.JanaMatthewsGroup.com

Gregory Canyon Morning

In the woods I feel like a philosopher, all perspective, wily and grizzled. There are no cannons or fortifications of flesh and bone. The universe' missive is clear and cold and comforting. "we perish each alone" she says through the brook pounding it's way down the canyon, through the million solitary pines who brush each other in the breeze, but never speak. In this stoic house I watch and weep, ponder and rejoice, at the beautiful tragedy each day brings.

pogoplug

I was visiting with Brad Feld a couple of weeks ago talking startups, techstars, and summer in Boulder and ended with a brief discussion of some of his more recent portfolio companies. One of them is PogoPlug. While I'm not sure about the name (pogoplug, really?), it offers one hell of a service for $99.

So what DOES a pogoplug do, you ask? It makes your files accessible over the internet. Copy the files you would like to make available onto a USB drive, power up your pogoplug, connect it to your router via ethernet, plug in your usb drive, and sign up for the service online. voila. Remote file heaven. Want to share your MP3's, or photos of that last trip abroad. Throw them on the pogoplug and share them. It even has a handy piece of software that makes it look like it's a local drive. This is soooo much more flexible than using Google Docs because you can share files of any type and size. Note - I haven't tried out the iphone integration yet. I'll try to get out another post once I've checked out that feature.

Installation was a breeze, the user experience was straight forward and intuitive, the packaging slick and simple.

The only thing I would add is offline synchronization, specifically itunes and iphoto, but easily applied to anything (folder, file, etc). I have a Mac Air. It is storage challenged so the pogoplug has been a great addition. My biggest hassle has been with itunes though. I want to store my entire music collection (about 50GB) on the pogoplug and keep about 15GB locally stored on my Mac (for use on airplanes, trains, and automobiles). When I buy new music I want it to automatically sync (library, files, and all) over to the pogoplug when I show back up online. Ok, maybe the software asks first, because, who knows, I may be sitting in an airport or coffee shop with a slow connection. But after asking, it just syncs whatever it needs to to make sure the pogoplug maintains the superset. Same could be said for files. I'm working on a big presentation. I've shared it with a couple of people. I make abundant changes while working offline and then come back online. Ask first, then sync, and finally send email to the people I've shared the file with (asking first whether to send update email). That would be beyond awesome and happily worth an extra $39.95 for the device.

Also, Wired brought up that there may be security holes, so you may want to dig more before making sensitive material available. I looked into it on the support site and their claims seem fairly solid though I haven't tested (see below).

Pogoplug is tied to your email address and protected by a password that you assign. We always try to create a direct connection between your computer and the Pogoplug (fully encrypted), but even when we do have to relay through our service it is done using an encrypted tunnel. Pogoplug effectively creates a vpn into your hard drive that is very secure. Web access is over ssl, including initial email address/password authentication.

Well done Cloud Engine and Brad and Ross, thanks for sharing.

SXSW (music) in a Nutshell

Yep, that's right, I was there. And I didn't even arrive early for the interactive part of the festival. This was pure unabashed vacation time to check out the biggest music festival for music industry insiders in the USA. Epic. Carnival-like. Night of the Living Dead. These were all phrases used to describe the event by the local press. The music got started by 11am every day and worked it's way through multiple crescendos at different venues through out the day and ended with thousands of zombie-like fans, bands, and entourage looking for the last party around 3am (usually RedBull).

Strategy and preparation are key. Without benefit of an event pass you must RSVP to multiple shows each day and prioritize your route through the chaos to try to catch the bands most worth seeing. And that may change mid-event as buzz erupts around how brilliant or authentic or ordained this or that band is, based solely upon the performance a group of people in your social media circle witnessed the night before. Bragging rights are around unbelievable performances (such as the reportedly off the charts performance by Jane's Addiction at the Playboy party) or new discoveries ("hey did you catch that show by Pains of Being Pure at Heart"?).

Twitter was a fairly big connection point and I have to believe much bigger than at last year's event, further emphasizing it's rising role in social nets as the real time bondo. I hear FourSquare (for you disgruntled dodgeball fans) was also big at the interactive portion of sxsw but didn't really see many people using it during music. All in all, great time. I came back with what was labeled as sxsw sars (really bad chest cold which turned into bronchitis) and a lot less money than when I left so would say from my financial and health deficits that it added up to one hell of an experience. ... and yes, I bought the tee shirt at the airport on the way out of town.


Overall experience top 14 list:

1. plus ones FTW!
2. twitter
   
3. bloody mary's as breakfast
4. waffles in the shape of texas (everything in the shape of texas)
5. non aggro doormen
6. sunshine
7. random connections
8. dual stage venues
9. blackout curtains in the hotel room
   
10. lines suck
11. rsvp lists on delicious (thanks go to Tessa @ DriveAFasterCar)
    
12. bands who twitter
13. VIP lounges with food
14. brisket

And my tops list of bands:

• Grizzly Bear - similar to Fleet Foxes, intricate melodies and orchestrated sound. Try "Knife" from the Yellow House album.
  
• The Whip - Not sure how to categorize, somewhere in between NiN and Crystal Method with some Basement Jaxx thrown in? And they don't just use a drum track. They have a kick ass female drummer and awesome bass player. They had the entire club dancing at the British Embassy party. High energy. Try "Fire" and "Trash"
  
• Crystal Antlers - straight up blues rock. wall of sound.
• The Pains Of Being Pure At Heart - Maybe the best of the week. Awesome 90's throwback sound. Definitely try these guys out. Here's a link to them on Hype Machine. Give "Young Adult Friction" a listen.
• The Republic Tigers - something like Bloc Party.
  
• Vivian Girls - three piece garage girl band. a much better version of Hole
• The Black Lips - Atlanta band, been around for a while and just breaking through. Headlined one show. Sound kind of country Rolling Stones
• Voxtrot - Jangly guitar pop
• We Were Promised Jetpacks - great fucking name. Scottish band. Actually didn't see them but meant to and downloaded the one free song available from Amazon.
  
• Cursive - didn't see them but they were getting some hype, so downloaded and listened. good stuff. Try out "From the Hips"
  
• Wave Machines - a lot of falsetto, mix of dance and rock, very tight set. They wear masks of themselves. Kind of strange I know, and I don't think they necessarily need the extra bit in the act. They sound a little like MGMT. Ok, you might not think so if you're a huge MGMT fan, but popularity breeds comparison.
  
• Blitzen Trapper - also didn't get in to see them but very much worth the listen! Try the title track on the Furr album.
• Chairlift - I've seen them before and saw them twice on this trip! Great band. Reportedly the inspiration for them was to make music for haunted houses and got their start around the same time as MGMT in New York (even remixing "Evident Utensil" by MGMT as one of their first releases). What's up with Caroline's leg tats? Following up Chairlift at Red7 was Telepathic, another rising avant-pop band composed of two women drums, sample track, and dancers. Also, worth checking out.

that's it. so long southwest.

Social Media Panel

Get Social Media? from JohnstonWells Public Relations on Vimeo.


I participated in this panel back in November hosted by the PR firm Johnston-Wells of Denver. These guys are at the forefront of helping companies figure out the new world of social media and "the why and how" of effectively participating in this powerful distributed world of consumer influence.

The event was well attended by local companies in the Denver front range community and highlighted the range of emotional embrace organizations have for social media, from outright fear to competitive advantage.

Splash

My mom just found one of the poems I wrote back in 1994 stuffed in a closet in an old notebook and sent it to me. Certainly a sign that it wanted to be published...

SPLASH
Animal hunger cessation
The stone stops
in mid flight
Looks up for instructions
then plummets
Through the evening sky
Through dusk
Through eternity
Curtsy and
SPLASH!!
The waves ripple
slowly towards shore
Overpowering current,
Nature disrupted in an instant
The stone, unaware and uncaring now
of its effect on the surface
lilts lazily from side to side
On its own path,
Its own luxurious ride
To the sandy deep.

Written November 25, 1994

copyright 2009 Tim Wolters

Salvation

In blank spaces
in between the trees
where I've walked
with the secrets
of stones and creeks and grasses
only given to
insouciant passers by
on their way to death
with no time for anything but truth
with the trilling sound of worms
rising
in chorus to meet each new day
filled with echos of laughter
we used to bring with us
in back packs and school lunch boxes
when we missed our mothers and fathers
long gone on roads of their own choosing
with blame
and convalescence just a phone call away
that never gets made
because we're so fucking wise to god's ways
and how the puzzles get played
into the darkness we'll go
amazed, amazed at how little we see
on these back roads, these side roads
so sure of salvation
and knowing
one beautiful day she'll come

copyright 2009 Tim Wolters

iGloves and ski runs

Just saw this posting today on ArsTechnica. I suppose the world needs an iGlove. After all there are huge numbers of iphone users living above 40 degrees latitude that need to keep their hands warm while texting or using the iFart application. Really? I was just having a conversation with a friend of mine about the comforts of heated steering wheels, so this doesn't seem outside of the realm of necessity at this particular moment. Perhaps the screen can be heated as well to provide further comfort for when that moment of co-dependent connectivity strikes in the bitter cold.

I guess I sort of feel like we've lost our way a little bit and become too attached to this virtual world and less cognizant of the immediate physical world floating near our sedate and corpulent lifestyles. I am so guilty. Yesterday I had a wonderful time skiing with a friend. No time for texting, twittering, friending, or following when careening down a black slope, edges committed to avoiding trees, bumps, other skiers and the occasional bare rock. I was waiting for a response from a request I had made and for the first two runs felt anxious and wanting to check my phone. This quickly melted away with the afternoon snow and later felt grateful for the physicality and leaving the digital behind if only for a time.

Now I'm back, online, and blogging away, and better, more clear headed from my digital respite. This new hyper-connectedness is great, but it's also great to take a break.

Boulder Twits

Just became aware of the BoulderTwits site. This is kind of a fun analysis of twitter interconnections in the Boulder area. There are a few people that I don't know listed here but not many! I will certainly remedy that.



credits:
I'm sorry Brad, I think Amy brought this to my attention before you did, but only because I missed your blog entry :(

Passport

Passport

just once yearling
rise above these eaves
escaping gravity
and soar through the heavens
grown deeper than imagination
to that place that never sleeps
and always plays
some song or other
on the wind
where laughter never fades
but sits in that moment
without care
alive and being

copyright 2009 Tim Wolters