A few weeks ago, I was a speaker in a session hosted by TechBizConnection, a southern California networking group for technology entrepreneurs. There were some great quotes by the other speakers in the event on the challenges of building a new company. I want to apologize in advance for not recalling who offered which quotes! Following are some of the best quotes I heard in this meeting and other places along the way.

“It’s like taking off in an airplane that hasn’t been built”: This refers to the challenge of creating a new company (constantly learning and changing plans) while at the same time trying to land first customers and sell new products. By the way, this reminds me of a topic dear to me - “Why You Shouldn’t Write a Business Plan“. Continue Reading »

There’s been a lot of talk lately about investors laying low due to the recent slowdown in the economy. Looking closer at the numbers, it appears that there is a lot still happening.

Ben Kuo at SocalTech points us to the recent National Venture Capital Association (NVCA) study published just a few days ago. Though the amount of venture capital invested in southern California from Q1, 2007 to Q1, 2008 has decreased from $1.1B to $856M, the number of deals has actually risen! 93 companies were financed Q1 this year versus 85 last year.

Though valuations are lower and capital may be more difficult to come by, venture investors are still alive and well. Yes, exit markets are tightening up. Yes, the IPO market for venture baked companies seems to be in a drought.

However, keep in mind that there is a very distinct cycle to venture capital. Companies receiving their first round of institutional capital this year have a 3 to 5 year time horizon before they exit.  Don’t forget that several household names (i.e. Google, Paypal) “grew up” during downturns - just like the one we’re in right now.

Today’s Los Angeles Times carries an article that predicts that 2008 will be even tougher for start-ups seeking cash. There are a few themes in this article that we often talk about:

Venture investors will be very picky and, specifically, they will be looking for “the complete package”:  great technology, a big market, a strong team and, most important, evidence that the company has already started to get traction. This is a bit self-serving, but we think that groups such as Momentum can help bridge the funding gap by providing bridge funds and  management that is willing to go at risk to get traction.

There is also an interesting anecdote on a theme we often talk about: high valuations in early rounds are often a BAD thing. A company featured in the article was unable to raise additional capital during the current economic slowdown because they had been so successful at achieving a high valuation in an earlier round (it is always difficult to do a “flat” or “down” round).  So, the company went out of business.

If there is any news is in this article it is “more of the same”. You should not expect to fund a great idea or a great product but should be working to build a solid company one step at a time.  As you take capital along the way, don’t always focus on valuation but instead focus on getting the right amount of capital from the right partners.

Noam Wasserman, a professor at Harvard Business School, came up with a core concept about startup founder motivations:

Rich versus King?

Academics are long known for coming up with interesting, but relatively impracticable concepts. This is not one of them. Founders need to understand their motivation for starting the company. By taking time out in the early stages to understand why you are building the company, you can avoid a lot of heartache and headache down the road. Continue Reading »