Sunday, October 11, 2009

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.

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