Here are some highlights from the workshop that featured two lawyers (Sam Angus and Mark Stevens of Fenwick & West), two VCs (Will Price of Hummer Winblad and Dan Beldy, Steamboat Ventures), and one entrepreneur, Jed Simmons, COO of Next New Networks whose company raised $8 million from non-Silicon Valley investors for their content business:
- Will said he thought the Charles River Venture Quick Start program (which provides seed capital of up to $250,000 for entrepreneurs) is a terrible thing for entrepreneurs, and he explained why. With their convertible note, they have an option on the next round. If you run through their capital, and need more, and then they decide to pass on your next round, then basically “you’re dead.” No other VC is going to want to touch your deal if the first VC that funds you decides to pass on the second round. As a counter-point, Dan Beldy said if you are an entrepreneur and have no other funding options except this kind of VC Quick Start program, so your decision is to not have a company or to have a company under these conditions, then of course, you take this money. But Dan said you may be able to take the money without giving the VC the predetermined right to your next round, or you try to get others in the round, so the signals to the market, if the VC passes, aren’t quite as strong, so you aren’t quite as dead. Will said he said Charles River just wanted to buy deal flow so they put out a “honey pot” to attract entrepreneurs, but that this isn’t a good deal for entrepreneurs.
- Jed was asked why he took $8 million instead of doing a $1-2 million Series A round and then going back for more after he had proven his business could get traction. He said that his content/community strategy was to launch 10-15 properties he could get scale in the world of distribution through MySpace and YouTube. If we had only taken $1-2 million, so we could only launch one property, and we had been successful, the VCs would have then said, you’re a one-hit wonder, so how do we know you can repeat this success, and we didn’t want to do that–we wanted to prove by hiring young video talent that we could create multiple successes. So we raised enough to do that.
- Exit possibilities are very different if you take $2 million from angels, where a $30-50 million acquisition looks attractive, than if you take $8 million from a VC fund.
- Most interesting quote from Sam of Fenwick & West, “It’s unusual now to see angels doing convertible notes.” I guess there are enough sophisticated angels these days that deals that are priced are more common than deals that are going to be priced later.
- Only take money from VCs if you believe they will add value. Don’t do it if you view them as a “necessary evil.” Many serial entrepreneurs in Silicon Valley go to VCs even on their 3rd or 4th startup–not because they need the money, but because they know having a team with experience and connections actually improves the likelihood of success, and of creating a bigger pie.