• How Did We Get Our Idea For Our Startup?

    Posted: Tue, 17 Jun 2008 11:32:40 -0700

    Q:  We just started looking for venture funding and I have a question. Why do VC’s ask us how our idea came about? Are they looking for an emotional and inspiring story or are they worried that we may have taken our idea from someone else or, what I believe is the case, do they want to see if we were driven by an opening in the market that we observed? Of course, if we are giving our answer in a way that addresses one or two of these issues then you are probably missing the third.  Please help!

    A: (Jason)  Without sounding too glib the answer is “all of the above and maybe more, probably.”  Your guesses as to why are probably accurate and it, of course depends on to whom you are speaking with.  I’ll address each of your guesses individually.

    1.  “Emotionally and Inspiring Story” –  Without getting all Sally Struthers-like, it is nice to see engaged and passionate entrepreneurs.  Building a successful startup is really, really tough.  If you aren’t in love with the company going in, it will not turn out well for you or your investors.  That being said, don’t put on an act.

    2. “Taken Our Idea from someone else” – This is a big one.  If you come and pitch a next-generation social networking site and previously worked at Facebook, we are going to have an in-depth discussion.  Maybe you didn’t steal it, but maybe your former employer will have a claim on the intellectual property developed while you were employed.

    3. “Driven by a new market” – This also might be part of the question.  Whatever VC you speak to, you should know more about your market than they do.  I, personally, ask many questions and rely on them as part of my education.  Maybe you really have found an “unscratched itch.”

    One other potential reason is to see how you sell the vision and product.  You are going to get this question often from potential customers and this is a way to see you sell and see how efficiently you can answer a potentially complicated question.

    Or, perhaps it is just a trite icebreaker and the VCs are just asking you this so they’ll have time to answer emails on their blackberry while you wax poetically.

  • I’ve Got Angels Who Want To Invest But Not Lead – Now What?

    Posted: Mon, 16 Jun 2008 16:28:39 -0700

    Q: I have several angels that say the want to invest but non of them wants to lead. In your experience: 1) Is this a “call option” strategy rather than a serious investment intent? 2) any thoughts on how to turn “co investors” into lead? or should I try to get a lead of this “co investors” pack?

    A: (Brad) While it’s hard to tell whether this is a call option or serious investment intent, it is not that helpful in getting the round pulled together.  When doing an angel round, you need two things: (1) a lead investor who is willing to negotiate terms and (2) supporting investors that won’t lead but are committed to participating on whatever terms the lead negotiates with you.

    While you can’t contractually commit the supporting investors, you can usually separate the real ones from the tire kickers (or – more generously – the call option people).  Committed supporting investors are going to let you use their names with potential lead investors, will engage in active networking, and will name a specific amount they are willing to invest.

    These supporting investors are typically called “soft circles” – you’ve got a commitment from them, but it’s not a legally binding one.  A soft circle will always have a dollar amount attached to it.

    So – don’t try to convert these “followers” into “leads”.  Instead, try to get them into a supporting investor / soft circle mode.