A friend of mine is currently in the process of bootstrapping to start an ad-supported internet content business. However, she doesn’t have very much seed capital to fund the initial development of the basic functionality of the product, and is now trying to determine how to fund the business. One option that she considered is granting not-so-insignificant options and/or founder’s equity to a few software engineers in order to compensate them for getting the product up and going. Another would be to approach select angels for an initial seed round of investment. Sounds like a typical situation that we’ve all seen before. However, she is not following this path, and her reasoning is a follows.
Her perspective is grounded on the fact that a significant information asymmetry that exists between an entrepreneur and his or her constituents, especially extremely early in company formation. No matter how much she communicates her vision of the opportunity, prospective employees/contractors and angel investors alike are not going to be as fully informed about the situation as she is. Only she fully knows the market opportunity and has complete confidence in her ability to execute on it. Because of this differing level of information among each party, her constituents are going to perceive her venture to be riskier than it actually is. And investors and employees are going to want a higher compensation-level for that added perceived risk. Consequently, she doesn’t want to give up more equity than she believes is a “fair price” for investment or services, as these other parties have an inherently different viewpoint than she does.
So this entrepreneur is forgoing granting equity to prospective employees and raising angel seed money. Instead, she is going to work on a consulting basis to an unrelated business to generate cash on the side. This cash will be used to directly pay contract programmers for their time at cash market rates – without a premium for the information asymmetry. Her belief is that once she has a demonstrable product up and going with significant revenue, the information asymmetry will be reduced (though not eliminated) and her company’s equity will be more fairly priced by the market (prospective employees and investors).
Of course, one could make counter arguments. Is she being paid a fair amount for the opportunity cost of her time for the consulting gig? If not, perhaps a different imbalance exists. Or one could contend that granting options factors in the risk involved with the venture, as an option’s value increases with volatility. And perhaps by working on two different projects at once, she runs the risk of losing focus and/or exposes herself to time-to-market risk.
Regardless of the above issues, what is clear to me is that this entrepreneur’s perspective is very thoughtful and deliberate about her approach to bootstrapping a company. And her view about the information asymmetry that exists early in a company is both insightful and real. Do others have additional thoughts?
UPDATE: There are a number of good comments on this post that are worth reading.

All VC firms are all different. As I wrote about in a previous post, every one has a different process for evaluating a potential new deal. In addition, venture firms all have a different magic number for how much capital they would like to deploy into each of their portfolio companies.
At the heart of the issue is that different VCs are managing different sized funds – so the appetite for how much capital they would like to invest in a company over its lifetime varies accordingly. Because venture firms’ partner time is limited by how many relationships with portfolio companies s/he can manage, VCs only have a set amount of bandwidth to cover a certain number of deals. As a result, the amount of per-partner capital under management is directly proportional to the amount that needs to be deployed per investment.
The above statement may seem self-evident in retrospect, but I am not surprised that many of the (usually first-time) entrepreneurs that we meet with who don’t ask about our fund and typical investment size (until we bring it up) or don’t appear to fully understand the ramifications of it. In conjunction with finding a VC that is the right fit, part of the difficulty on the entrepreneurs’ end is trying to wrap their head around how much capital s/he will need to fully fund the “vision” over the lifetime of the company. Raising money from a small fund (or a syndicate of small funds) may leave the entrepreneur back at square one in looking for additional growth capital when his/her current investors have max’ed out the level of investment that they are comfortable with. This situation is not terribly bad, as smaller fund investors do provide a valuable feeder system into the larger funds. On the other side of the coin, however, getting into bed with large-fund investors with a need to deploy significant capital too soon may create a situation where there is undue pressure for the entrepreneur to spend and expand at a rate which may not be healthy for the company (and, in turn, reduce the amount of founders’ equity in subsequent rounds).
Like in many other aspects in starting a company, it is the job of the entrepreneur to manage this issue with balance. Choosing thoughtful syndicate of investors is one way to further address these concerns. In determining if a venture firm is a good fit for an entrepreneur (and vis versa), every first meeting should include a brief discussion about fund size, typical initial investment size, and the magic number of how much the VC would ideally like to deploy over the life of a company.

Last week, Nivi launched an RSS feed entitled “The VC Channel.” It is an aggregation of a number of VC bloggers’ RSS feeds (disclosure: including my own). In his words,

“The VC Channel is for the person who wants to read VC blogs but doesn’t want to spend the time to find the good ones and subscribe to all of them… I will add good VC blogs as I find them and prune the blogs that get stupid. You just sit back and read.”

This “channel approach” is effectively trying to solve two of the problems that I think are apparent in reading blog content today:
1. The difficulty in searching and discovering content.
2. The trouble in filtering through the massive amount of content available to read only that of value.
Nivi is essentially becoming an editor of sorts by keeping updated on the newest VC blogs, so I don’t have to (solving problem #1). And then he is actively selecting what he deems valuable (and hopes that I as a reader do as well) (solving problem #2).
It’s an interesting model to approach solving these two issues. And it looks like the SuperBlog service that he is using offers a plethora of other “channels” put together by other users. Is this editorial process going to solve our/my problem of information overload? Or are technologies like Findory going to do this in a more automated fashion? There are a number of ways to search and discover new content (blog search engines, tag feeds, etc.), but what’s the best way to filter through all of that which is available? I am not sure of the answers to these questions, but for now, I am going to subscribe to the VC Channel here. Obviously, it’s an evolving space, and I don’t think that there is one right answer.
(Note that there are a number of copyright and monetization issues involved with this re-syndication of content, which perhaps I’ll comment on in a later post. But for now, you can read some of the comments about it on Nivi’s blog. My own motivations for blogging aren’t financial, so I am less concerned about re-syndication, but others, especially those in the publishing business, aren’t as tolerant.)

I was recently chatting with a friend of mine about a well respected technology veteran whom we both mutually know. This executive has been considering joining the board of a venture backed company that is currently doing very well and on the cusp of IPO’ing in the future. The company wants him to join as Chairman, primarily to lend his connections to the banking and public markets world, as well as to ensure that the company is Sarbanes-Oxley compliant upon IPO.
Unfortunately, SOX regulations have made this executive extremely reluctant to join this company. Prior to 2002, reducing (eliminating?) the risk of fraud in public companies’ accounting statements was bourn by shareholders, auditors, and executives. Whereas, now the lawsuit risk shifts (or is at least in this executive’s eyes, perceived to shift) more towards the executives and board members.
If this executive’s risk has increased, has his return increased as well? A first look at Mercer’s annual study of CEO compensation indicates that it has, but closer inspection reveals that it has risen only commensurate with company performance in a rebounding economy, rather than with risk.
Should a CEO really be compensated for not lying? By no means am I a lawyer, but my understanding is that Sarbanes-Oxley makes a company’s board jointly and severally liable for actions that are not even their own. If a board member isn’t on the audit committee, he or she can still be held personally liable for the actions of a rogue CFO. (If I am off here, please do let me know, but that is his perception of the situation, which is what matters in this case specifically). Perhaps that kind of exposure does deserve extra compensation.
Regardless, late-stage startups are the most affected by this issue. Sarbanes-Oxley has erected a substantial cost and time barrier to tapping the public markets for capital. In addition, it is quite common for a soon-to-IPO startup to clean up the board and bring in seasoned veterans. However, this process is going to be more difficult. Candidates will spend more time and effort performing due diligence, as they bear more (perceived) risk, and the company will potentially have to raise compensation for an outsider to assume the risk of compliance in a company that he or she doesn’t know as well as the founders. If the candidate decides that their personal wealth is not worth risking, the company loses.
My interpretation of the lesson here: startups should begin cleaning up the board sooner than they would have in the past. They should identify and inform candidates early. They should place Sarbanes-Oxley procedures into the company sooner rather than later, and make these principles part of the company’s culture, so that the switch to full compliance is an easy one.

You’ve been carrying around your phone for a number of years now. What have you done with it, really? Used it like a regular phone, like everyone has. You call people. Maybe in the past couple of years you have had a Treo or equivalent and use it for e-mail. And most likely the most recent mobile phone you purchased has a camera. What did you do with that feature? Me, I took a few photos of my close friends to make them appear on the screen when they called, e-mailed one test photo to a friend, and then became bored and stopped.
That’s all changing. Already your mobile camera phone is transforming from a two-way radio into your portable input device. Now you can take a picture, e-mail it to Flickr, and post it to your blog. Soon we’ll be able to do the same thing with video, not just still-photos. Mobile blogging interfaces and adoption have some ways to go, but we are already starting to see how user-generated content can be enhanced by mobile contribution. Add location-based services into the mix and things get really interesting. Google’s Dodgeball is only the first step in tagging location meta-data to content. And that’s just the beginning. Once we view our phones as a portable input device, a whole new world opens and novel uses unfold. On U2’s concert tour this summer, the band is asking attendees to SMS their name to a short-code, and everyone’s name appears on a giant screen later in the show. Companies like Mobot are using the camera phone to search visual images and point users to relevant information.
Is the mobile phone the new mouse?

My post last week, “VCs and Angels, Where are the Angel Bloggers?” generated quite a bit of interest and notable discussion. According to my Feedburner stats, more of my readers (on a percentage basis) clicked-through this entry than any other post to date. More importantly, others joined shared their own thoughts. Recently Fred Wilson commented that he wished he could “elevate the really good [comments] with links back to the original posts.” I would like to do that here, too. But since raising trackbacks and comments isn’t an option now with Moveable Type, and I want to facilitate a true discussion in my blog as opposed to a one-way monologue, I am going to highlight some of the highlights of the conversations that emerged in response to this post.
The question at hand is: if VCs are prolific bloggers, why aren’t angel investors as well? Why aren’t there more visible angel bloggers? Paul Kedrosky echoed my inquiry, “While I’ve written before about the surprising (at least to me) number of venture bloggers, that number doesn’t include angels, of which I can think of, well, something like none.”
Jeff Clavier notes that “quite a few VCs will double as Angel bloggers.” And he also names a number of high-profile angel investors, “Mark Cuban, Esther Dyson, Joe Kraus, Loic Le Meur, Joi Ito, Nick Denton, Mark Pincus, Andrew Anker.” Yes, these individuals aren’t doing angel investing a primary pursuit, but they do actively participate.
Ed Nusbaum of Ventureblogs commented, “most angels don’t blog about their investing since they try to avoid the hassle of being overly visible.”
B Watson theorized, “I think that blogging is still a little new and cutting edge for most of the angel community out there.”
In sum, it seems that the bloggers who do make angel investments are engaged in other activities that leads them to blog as well. Angel investing isn’t their main subject matter. And for the others, it sounds like there is value in keeping a low profile as an angel investor that VCs weigh with other tradeoffs. Or perhaps some angels are still coming up to speed on the idea of joining the blogging community. If the latter is the case, then I am looking forward to seeing more angels blogging in the near future.
Any other thoughts or ideas out there?
UPDATE: I’d highly recommend reading the follow-up comments to this post.

It’s been a week since the announcement of the $620M acquisition of Shopping.com by eBay. And now that the dust has settled, I wanted to offer my quick thoughts on why eBay made this move.
Businessweek says it’s to relieve the company’s “dependence on mostly small merchants.”
Motley Fool suggests that the acquisition gives eBay “new customers, a sophisticated community platform, and a large merchant base. What’s more, eBay now has two more strong brands — Shopping.com and Epinions.com.”
The Clickety Clack blog offers a thoughtful alternative explanation: “Ebay bought Shopping.com partly to get rid of a major CPC competitor on Yahoo (Overture) and Google (Adwords).”
Yes, I think that the acquisition was about all of the above reasons. But I wanted to emphasize the importance of search, namely paid search, in the deal (as Clickety Clack suggests). At the heart of eBay’s troubles right now is how and if users find the appropriate product on its site. Do consumers automatically go to eBay to look for a product that they want to buy? Or do they go to a comparison shopping engine instead? Or do they just go to Google or another search engine first? The difficulty is that many people do start at the latter two, and eBay pays a referral fee directly or indirectly (through affiliates) to acquire the user if a shopper begins his search at another destination. Or worse yet, consumers are heading from Google or comparison engines straight to merchants’ sites that have “graduated” from the eBay platform. In these cases, eBay is cut out of the process entirely.
For many, eBay is merely the end-transaction site, but it wants to climb up the value chain in the shopping process. Google is reaching further from the other side in offering product information on Froogle, along with other efforts. I would argue that eBay’s acquisition of Shopping.com was partially a defensive power play against Google, as a way to capture searching shoppers before the traffic is sent elsewhere.

Marc Goldberg wonders, “Is the bubble back?” While it is always difficult to discern the size of a storm from the inside, we should consider a few questions:
Are venture deal median prices increasing? Yes.
Are the newspapers filled with stories about Silicon Valley entrepreneurs looking to get even richer? Yes.
Have we seen recent high-profile triple-digit acquisitions? Yes.
Are internet companies’ stock prices rivaling “traditional” media companies’? Yes.
But…
Has the Nasdaq gone through the roof in the past few months? No.
Is there so much hysteria that MBAs are leaving their cushy consulting jobs in droves to start companies? No.
Have we lost a sense of grounding that we’re proposing new valuation metrics? No.
Is everyone partying like it’s 1999? Not yet.
No, I would argue that the bubble isn’t back just yet, though Jeff Bussgang wonders if it is coming. Yes, I agree that there is a lot of excitement in the air, but that doesn’t necessarily mean that we are in or are entering a bubble.
I am not saying that there aren’t investments currently being made with unrealistic expectations. Nor am I saying that companies are being funded at extremely lofty prices. Nor am I saying that there are companies being funded that won’t survive. It’s all part of the business.
What we’re in is a rejuvenation. After a cold winter, the internet is back. And in comparison to a couple years ago, things feel great. Heidi Roizen announces this fact in none other than a podcast. It’s indeed a new era, but not a bubble – yet.

“What is your process?”
It’s an easy question to ask, but only a few entrepreneurs do.
Allen Morgan has written a great series of posts advising entrepreneur’s on their first meeting with a VC. And as he explains,

“The goal of your first meeting with a VC IS NOT to get a funding commitment. The goal of your first meeting IS to get a second meeting.”

But then what?
What is the process for a venture capital firm to progress from a successful initial meeting with a company to putting a term sheet on the table?
There isn’t an easy answer – it truly varies from firm to firm. At the heart, venture capital firms are comprised of a number of unique individual partners. Given that different firms have a number of different partners, that sometimes firms have geographical spread among its partners, and that every firms’ partners have different personalities, every firms’ decision-making process is going to be different. The organization of a partnership and its corresponding structure is going to reflect the unique situation that these group of individuals face.
For example, I know of one firm that formally assigns both an “advocate” partner and a “skeptic” partner to evaluate a potential investment. Others will consider an investment less formally. Some will write diligent investment memorandums based on specific, itemized checklists to ensure that all basis have been covered. Others rely on more of an intuitive approach to evaluation. Some have regularly-scheduled investment meetings, while others will convene when a deal is “hot.” Some firms have a formal voting process, while others are consensus-driven.
Because of these differences, both the types of questions asked of an entrepreneur and when they are asked are going to differ from firm to firm – and what these questions signal to the entrepreneur can also differ. Asking about the process may not result in a full revelation of what goes on behind the curtain, but it should yield some insights to guide the entrepreneur along the way.
“What is your process?” It doesn’t hurt to ask.

Last Friday I had a conversation with Tony Stanco from the Council on Entrepreneurial Tech Transfer and Commercialization at George Washington University. He called to chat about VC bloggers’ thoughts on the report that he published last week, Survey: The Relationship between Angels and Venture Capitalists in the Venture Industry. An article in Private Equity Week summarizes the findings:

“In the survey, more than 300 venture capitalists and angels overwhelmingly agree that angels are beneficial to the venture capital industry. In fact, a higher percentage of VCs than angels (94% to 72%) said that angel investors are beneficial…
While the survey notes the “general foundation of goodwill and respect” between angels and VCs, 100% of VCs and 94% of angel investors agreed that the two sides could do a better job working together…
The chief problem that persists between the two groups is deal pricing. In the survey, 78% of VCs cited “unrealistic company valuation” as a reason that a company with angel involvement would be unattractive. Half of the angels surveyed agreed with them. It was the most popular response from both groups.”

I agree with the above two points. First, that angels are indeed extremely beneficial to venture capitalists, as they are an integral source of seed capital and support for entrepreneurs seeking levels of financing that are still as-yet too small or risky for institutional involvement. And yes, the issue of valuation is a viable reason for the tension between the two groups. I personally have seen a number of deals where the previous angel round and future expectations were at valuations that didn’t match our own.
But I believe that there is a deeper issue at play here – perhaps the tension also arises from lack of communication, as Stanco has suggested. Could we have an opening of the dialog in the blogophere as a new public forum to address the issues between angels and venture capitalists? We now have a mechanism to air our thoughts openly in bridging the gap in perspective between the two groups that wasn’t available with this audience just a couple years ago.
And to that end, I am wondering where are all of the angel bloggers? I know there are a few dozen VC bloggers out there. And a number of people have cited why VCs do blog (Paul Kedrosky, Seth Levine, and Jeff Clavier). Don’t most of the positive reasons also apply to angels, too?