VentureBeat

Dharmesh Shah said:

Excellent points and I agree with all of them.

On thought on the unfair advantage front: Barring any unique, defensible IP or partnershp, I like to see startups that have figured out a novel way to efficiently acquire customers. All things being equal (which admittedly, they rarely are), the startup that can get customers inexpensively wins.

Sceptic said:

What a risk-averse guy… Well let me tell you that if a company fulfills all the requirements, why would they be looking for money from YOU?

Thanks to people who are willing to risk their money, otherwise we wouldn’t have YouTube, Facebook, LinkedIn and bunch of other sites that are very easy to copy, but hard to get right.

DT Kuroda said:

All the points are valid, but there should be some additional definition.

What constites “Web 2.0″ in this version of term? In many cases, I’ve seen the definitions gravitate toward innovative applications of information collection and presentation by two guys in a garage with an internet connection.

While the examples listed are solid, I think I’ve seen those companies around for quite a while. Likewise, all the AJAX based web apps that are typically referred to as web 2.0 lack a parallel longevity and history. Of course, YouTube doesn’t fit many Web 2.0 definitions either.

So when a VC says they are interested in Web 2.0, I think it would help entreprenuers if the VC included a definition of the term means to them.

Aaron Mann said:

I feel compelled to comment on Tom’s comments, from a “web 2.0” (though we don’t actually use the term) startup founder perspective. I think Tom is right on in his criteria and his evaluation of what is out there today. They are sound business fundamentals that every entrepreneur should be able to address. I am funding our product development and I would not invest my own capital, or time, unless I thought the business met those (and few other) criteria.

The one a struggle with the most is “What gives you an unfair advantage”, mostly because I question whether anyone really can sustain an unfair long-term advantage in an open source world. It is one thing for a biomed company to create something that solves a problem and is completely covered by IP protection. A “web 2.0” company can’t generally protect themselves to that extent – I think the best “unfair advantage” you can hope for is to have defensible IP that makes it “hard” (but not necessarily impossible) for someone to replicate functionality. And I agree the IP should be “difficult”. I like it when developers tell me it is “complex” because that means it is harder for someone else to replicate what we are doing. From there you need an absolutely compelling product that solves a real set of problems, not just makes an incremental improvement. And early to market in a space that is big and growing at least puts you on the right side of the curve.

I do think from a VC perspective it is important to understand what exactly constitutes reasonable, achievable and sustainable advantage in a given market – especially one growing and changing as fast as the web 2.0 construct.

In short, I think the message is the right one – and founders would do well to heed it, even if it isn’t what they want to hear.

By the way - no conflict here, we aren’t looking for capital yet!

Naomi Moneypenny said:

I think Tom raises some good points in this post. But if you really have a unique and patented technology, that is able to fit a great many applications and client situations, it can often be hard to find investors with the foresight to see all the possibilities of how the technology could be used. Our (albeit limited) attempts at attracting investors have often resulted in very basic questions which have illustrated that people didn’t ‘get it’, as in the wide array of options to use the technology. Net result has led us to a happy path of being completely funded by clients :) But you have to wonder how many other people have had the same issue and failed because of an investor’s inability to understand levels of abstraction in software.

Anothersceptic said:

I’m sure many VCs would like interesting, structurally defensible, revenue-generating, low cost of acquisition companies. When they show up, I’ll bet they’re expensive.

I’ll bet Mike Moritz has different criteria (and no doubt, a different level of access to cool companies). But why would an entrepreneur invest the time to see if they can be the first company out of 100 or so to convince your firm to open its wallet? If I had a list of target funds for my company, Woodside Fund would come off.

Isaac Garcia said:

Execution and Cash Flow are more important than all of the criteria listed in the above post.

There are too many “me too” companies that have succeeded with worse technology, with changing business models and who grew from features to products over time.

Its all about execution - and less about technology. Technology works, obviously, in your favor, but execution trumps everything.

Mark Sears said:

“Pandora has generated unique and proprietary content with its “music genome” concept, which has taken them years to create.”

The Music Genome Concept is a marketing gimmick that relies on manual processes and has consumed millions in venture capital to date, not an example of deep technology.

dealboy said:

Writing a bland post on a tired topic with no new insight is really not the best way to market your firm.

Perhaps you should ask yourself what “unfair advantage” your fund has to offer, and that may tell you something about the dealflow you’ve been seeing.

Pran Kurup said:

In the conventional “textbook” investment sense these questions are absolutely pertinent to building any large sustainable business. But things have changed quite dramatically with the advent of Web 2.0 type companies. Acquisition is the most likely form of exit (Riya missed the bus on that and are probably figuring out what to do. What use is some unique image recognition technology when Google just acquires your competitor?).

Look at a few recent exits: Youtube, Writely, Jotspot, etc. to name just a few. Its hard to say that any of these companies ever met the criteria referred to above. Of these Writely was self funded (3 guys in a garage), Jotspot (probably built mostly on the founders wealth and maybe some VC funding courtesy the founders history), Youtube (had common investors with Google, their unfair advantage!:-) .

If the founders of these companies had tried to answer such conventional VC questions you probably wouldn’t have those and many more such startups and subsequent exits. At no stage could any of these companies have had convincing answers for any of these criteria.

Btw, there are VC firms out there willing to fork out smaller sums (as little as 250K). Its possible such firms are not so stringent about a checklist of criteria but are instead willing to hedge their bets on a reasonably sensible idea. Maybe Woodside does not believe in this model?

km4 said:

Tom is the ‘luddite’ managing director at the Woodside Fund.

Tom Shields said:

Thanks for all the comments!

My intent was to help entrepreneurs with a sort of “cheat sheet” to help them prepare for VC meetings (not just ours), but it seems some folks have taken it as a requirements list. I guess I didn’t make clear that while all these things help, there are plenty of exceptions that prove the rule.

Isaac: Execution is indeed crucial, but it’s usually very hard to diligence at the early stage that we invest (unless it’s product development execution).

Mark: I agree that Pandora does not have deep technology, but what they have is still hard to duplicate without putting in the same time and money. My Zillow example is also not technology.

Pran: I wrote a blog post about seed investing here (we have done it for years): http://www.oxyfish.com/wordpress/2006/11/21/much-ado-about-seed-investing/

And for the other snarks out there: we expect our entrepreneurs to choose us as diligently as we choose them. Bring us a good idea, and I’m happy to compete for it!

Isaac Garcia said:

You are a good sport Tom.

dave mcclure said:

hey tom: snarks aside, have to say i agree with sceptic & dealboy.

these days, there are lots of folks out there who have money to fund new ventures: angels, small VCs, big VCs, even the entrepreneurs themselves in many cases.

i’d have to say the biggest challenge for many VCs is to establish their own area of focus & expertise, and to communicate to startups & entrepreneurs why working with you is better for them.

anyway, i’m guessing you & other folks at Woodside have a more specific area of investing focus than just “web 2.0″… you might be able to help both yourself & potential startups out there by focusing on what that is.

i’m guessing with your background at NetGravity & DoubleClick, you probably have a solid foundation in internet advertising. that would be a significant advantage for many startups out there.

just my .02,

- dave mcclure

John Mustaine said:

No wonder you haven’t made an investment yet, because the companies you are looking for are those that are already on the road to success and have already been funded by forward-thinking VC’s and angels who are more risk averse and understand that it takes a lot of time and capital to develop proprietary technology, an edge over the competition and a real revenue model.

If we look at your criteria, then you wouldn’t have invested in any of the web 2.0 companies that have had a positive outcome in the past few years.

The fact that Riya is a dud shows that the ‘proprietary technology’ argument is wrong and that technology contributes a lot less to success than what too many investors believe. Again with the list of Web 2.0 companies that have had a good outcome in the past few years you can’t attribute proprietary technology as the primary cause of success to any of them.

Mark Sears said:

Tom,

As Isaac said, you definitely seem a good sport.

That said, Pandora is a not a good example. While they may have unique and proprietary content, Pandora could arguably achieve better results with a blend of user feedback and collaborative filtering. Manually rating each song according to arcane criteria is labor-intensive and doesn’t scale.

I agree that the “Music Genome Project” is hard to duplicate. But the question is, why would anyone want to?

Sceptic said:

Tom, thanks for responding.

I had a quick look at Woodside Fund website and according to your Press Releases:

- your firm hasn’t had an investment since June 2005
- last exit was in August 2003

Correct me if I’m wrong, but with 8 partners to pay, it must be no-brainer that at the moment, your firm has to be looking for reasonably large and relatively secure investments so you have something to show your LPs. And Web2.0 companies obviously aren’t either of those.

guy said:

Tom,

I would like to get your opinion regarding the notion there seems to be a dilemna in the venture capital and a relatively small number of firms and a small circle of partners are the ones doing most of the deals as they relate to web2.0. Mobius(Brad), BEnchmark(Bill), Greylock(Dave), Seqouia(Mike and Roelof) and KP appear to be the ones in the thick of most of the deals. I speculate that this is the case for a couple reasons:

1. Entrepreneurs like entrepreneurs and aren’t as fond of MBAs as MBAs wish. A founder with an MBA isn’t as common as one might think unless they’re from Stanford and their company was started as a project in the GSB :)

2. The cost of starting a business isn’t as great as it was in the past and the demand for venture capital may be the same, less than or greater than it has been in the past but very few funds are intersted in $1M-$4M rounds. Today, raising that amount of money is much easier and less time consuming to do via friends, family or from the 900 google millionaires.

3. Dealing with VCs in general is like going to the dentist for most entrepreneurs. Many will tell you how they’ll be a great resource for you but when the time comes to try to actually use them to get into one of their other portfolio co’s it is often the least efficient and most undesireable route to go. I’ve experienced this several times when trying to get a couple well known VCs to make intros to sister companies when my employer has been a portfolio co. VC intro is often a crappy way to get penetrate a co anyway because, if the VC actually makes an intro, chances are the guy you’re trying to get in touch with is feeling obliged to meet out of some fear of what said VC will think or say about you in the future.

4. VCs are lucky if 1 out of 10 of their investments achieves a return that puts their overall IRR at an acceptable level for them and their LPs yet are thought of and think of themselves as having a midas touch. If a baseball player gets a hit 1 out of 10 times he’s not going to be a baseball player for long, even if every one of those hits is a home run. It would be refreshing to see more humility from people in the business othe than yourself, Fred Wilson and Brad Feld.

5. This is somewhat addressed above but if I were a managing partner at a venture fund, it would be a prerequisite that anyone who comes on board has real world company experience and not simply for a year or two before they went to B School but actual experience in dealing with customers.

At the end of the day, VC is about relationships and a venture capitalist should view himself as a sales person because that is their role in the grand scheme of things. Their product is cash and they sell it to companies in exchange for payment(shares of companies are a form of currency). Succesful sales people are the ones who are honest and open and liked by the least common denominator because when that happens they get associated as not being an outsider but being an advocate.

just my $.02 even though i may have taken up $2 worth of comment space :)

Dave said:

We’re conducting a preliminary test to see how people react when given an idea to collaborate on and evolve. The idea we’re using is described below… it was / will be posted in various locations to gauge different types of user group responses.

Hey everyone, my friend and I have this idea that we need your help with (and feedback on). Wouldn’t it be awesome if you could attach voicenotes to a webpages? Better yet, imagine if you could call a predetermined phone number and leave a VM on a webpage for other people to listen to? It seems like a pretty killer use of VOIP if you ask me. We thought of this today when we were discussing ways to make our collaborative web portal (Wiki) more efficient. The problem with collaborative writing via Wiki is that you often need to call your co-collaborators to explain what you did, why you did it, and what you’re thinking for the next steps. Alternatively, you can embed explanitary comments within the text hoping that the next writer will delete them. If you could leave a VM instead, it would be much more effective. So here are our thoughts:

Does this technology (feature) already exist? If so, where (please provide links) and how can we integrate it into our website?
If not, do you think it would be useful?
How would you use it if it were available?
How could it be implimented?
Feel free to add your thoughts, ideas, etc… let’s evolve this idea as a community. Who knows, maybe something great will come out of it.

seesunshine said:

Excellent points I have to say. It is necessary for startups to think over these questions. On the other hand, to find really “big”, VCs shouild break some of the rules.

Ranjit Padmanabhan said:

As a fledgling entrepreneur, I’m a bit puzzled at some of the grumpy reactions here. While Tom may not divulge a super-secret formula that will get VCs to salivate copiously, any entrepreneur had better be prepared to address the points mentioned.

However, I don’t believe that there is just one right answer for each of them - there are just too many counter-examples.

One reason is that many of the attributes are difficult to quantify/measure and subject to interpretation. Is it “deep technology” or just a “grab-bag of heuristics”? Can “proprietary content” be overcome with “farms of English Majors in India”? And without doubt, one man’s “enabling technology with limitless applications” is another’s “feature”.

The second is that there are a large number of serendipitous and circumstantial factors that come into play during this Mating Dance such as presentation style, personal chemistry, attention spans, the entrepeneur in the previous time slot, etc.

My takeaway is that the more I think about the issues that Tom has enumerated, and the better I formulate my responses, the greater my chances of getting shortlisted for a follow-up meeting. In other words, I’d work hard to reduce the available pool of reasons for getting declined.

PS to “Dave” - you must have peeked at our investor pitch 8-). At DashNote, we’ve built the technology for text notes to be added to any web page. Our next objective is to enable media attachments including pictures, voice, and video.

Peter Cranstone said:

Hi Tom,

Don’t know if you are still reading these comments, so I hope this makes it through. I’d like to pitch our company 5o9 Inc. The founders are the inventors of mod_gzip. (The defacto standard for content acceleration on Apache web servers). We’ve invented a new technology called mod_lbs. LBS stands for location based services. It uses a browser side plugin to deliver real time GPS information and other data to a web server. The users data is protected on the device by encryption and also in transit. The software scales from mobile devices to the desktop and the server component runs on any web server on any OS. The unfair advantage is our client side technology and the fact that the Enterprise already is comfortable using our content acceleration technology. Mod_LBS also supports real time Bz2 compression which outperforms gzip in most cases.

Please check out our website for more information and we’d be happy to give you a real time demo.

Cheers,

Peter

Steven >> said:

There are numerous qualifications that get the funding. Tom mentioned a few, and the group brought up quite a few more. At the end of the day, the entrepreneur could use the culmination of the list as a checklist and gut check. The more of these questions they can answer based on their business application, the better chance they have at funding. Even if funding is not a goal, it would be beneficial for long-term planning of the business to be able to answer these strategic questions anyway.

Tom Shields said:

Yep, I’m still here, providing good sport. :-)

One of the most important things I didn’t mention (that a few of you brought up) is the match between the entrepreneur and the VC partner. Nothing kills a company faster than a dysfunctional relationship there, so choose your funders wisely.

All of our partners were entrepreneurs, this is another reason entrepreneurs choose our firm. We know there will be ups and downs, and part of our job is to do our best to help smooth those out, not amplify them.

Peter, feel free to send me some more info at toms@woodsidefund.com. I’m interested in how you plan to get distribution of your client.

Dave, check out Snapvine http://www.snapvine.com.

Sceptic, we don’t always do press releases, especially on investments. As for exits, here’s our most recent one: http://www.obi.com/ (although we aren’t doing health care deals any more).

Thanks again for the comments, keep ‘em coming!

-ts-

Naomi Moneypenny said:

I think that many startups often use VC funding as a proxy for real paying customers. It’s a dangerous trap to fall in, especially if you have a consumer oriented business, that needs to attract customers. I’m not convinced that getting the eyeballs will always result in a good profit model. Our company has a top business site (which we created to showcase our software), and if we had to rely on only traffic to make money, we would have been out of business a long time ago.

Kelly Smith said:

Is Riya really a success story? I’m not convinced. What’s the business model? Are they making any money?

tomo said:

Kelly,

Not that it petains to Riya yet or ever will but a success story for the investor is a exit which gives them a good return. Whether or not the company ever makes money is moot in many cases. Online adult entertainment has many companies making money on subscription and ad based business models yet not much, if any VC has been put to work in the space. Likely because there is no clear exit or liquidity perse. You would think the venture funds would mitigate risk on their overall portfolio by getting into a business which spits out large amounts of cash over a long period of time but VC is not put to work to produce cash flow, it is put to work where there is a defined path to a liquid exit. On the flip side, the many of the PE guys love cash flow and are getting more comfortable with venture like risk.

Jaydev Karande said:

I just want to say that I agree with some of what everyone has commented on so far. I am an entrepreneur who is in the process of validating my business model and I will soon be out there again to raise a series A. If can be confusing in this day in age to go out and listen to everyone’s opinion on VCs. If you are an entrepreneur who is reading this, take everything with a grain of salt and then go back and relate it to your business. What works for some may work for others but will not work for all. At the end of the day, “Are you solving some sort of pain?” That’s the question you have to ask and does anyone out there have a better solution. I wish you all the very best!

Jaydev

Rich Baker said:

I am looking for investors,business partners or a joint venture.

John Mott said:

The language used to describe the perfect investment vehicle sounds really geared towards the investors of the fund, not the entrepreneurs. The search for the company with an ‘unfair advantage’ sounds like geezer-talk. Of course we’d all like to date the perfect person who is rich, no baggage, attractive, great in bed, etc. etc. Real business people who create real companies understand that there is nothing new, a successful company is a combination of ingrediants. One is certainly the market opportunity, one deli store isn’t a big return opportunity, a franchise is. Execution weighs 100 times more than a patent. Look at what happened to Nutri-systems, a company way past their prime with loads of competition and nothing remarkable about it. New people took a new angle and made it happen through execution. Who would have funded the NetFlix business plan? The first comment would have been ‘Blockbuster could easily reproduce this and they have the distribution’. And yet, here we are.
I don’t blame VC firms, they have a constituency who want to hear how few risks they are going to take, so the pitch about ‘unfair advantage’ is a part of that.

Cornelis Jacobs said:

Dear Tom Shields,

Let me tell you one thing: if you see our proposal, you’ll be happy you haven’t invest in any of the dozens of proposals you have already seen.
Please look at our website and see our vid. Or check our investor document:
http://www.globalvillage.vc/GlobalVillage%20flyer.pdf

Cornelis Jacobs

Matt G said:

What was SFDC’s (NASD:CRM) defensible advantage? HTML? Webservers? A plan to make a dumbed down version of Siebel?

I’d have no hesitatation giving them $$$$ if I could go back in time to their A Round. People & Execution matter.

This is only the most obvious of many issues I have with this post.

yetanotherskeptic said:

Tom - Zillow raised $57 million before they had a deal with Yahoo. And there are lots of image recognition technologies out there challenging Riya.

My suspicion is that there are really only two criteria and the rest is vc bs:
1. The founding team is known by the vc and solid. This is certainly true of Riya and Zillow. Probably of pandora too. It was also true of YouTube and generally all the other successful Web2.0 investments to date.
2. They have an inkling of a good idea.

That’s it.

If a firm hit all your criteria, they don’t need you! Or maybe like Zappos, they’ll go get Sequoia on the team just to set the valuation bar.

Edgar Miguel Molina said:

What about a great company in Colombia South America. Our company needs US$1.000.000 Books Company is an Editorial Company working in education in privet and public schools. We have sold ina month more than US$2.000.000 but we don´t have resources to print all the material we sold.
Please, take a look on our website http://www.bookscompanycolombia.com and in spite that it´s in spanish, what we are doing is working in bilingualism. Sorry about my English, (it is not good enough. If you are interesting, please contact me and I´ll explain all about. we have an excellent bussiness plan, but it´s also in Spanish.
best regards,
Edgar Miguel Molina.

Spalva-au said:

drepession hurts

Spalva-ny said:

odot

Spalva-pg said:

mixolgy measurments

Chandra said:

Try posting at http://www.go4funding.com for the angel investors.

Dr Frank Willson said:

Attn,Sir/Madam

I am,

Dr Frank Willson.
22 Garden Close, Stamford,
Lincs, PE9 2YP, London
United Kingdom.

I want to confide this to you please. I am a little bit scared of what your reaction would be but what I have in mind will certainly require that I enlist the cooperation of someone . I need to move out some good funds to a safe repository. And I need to do it very fast. If I try to handle it by myself I will be attracting a lot of attention and the lid will be blown. Please note that the money involved is reasonable and I want to spend my time with you. The money in question will hit your account in less than two weeks if you are willing to cooperate with me. I need a safe account for this, in your name or your company name(which ever). The amount involved is $6.5 million.
Will you be able to handle this?

What do you want as your commission?

I would like to get into propers development with the funds. What do you say?

I await your prompt response.

regards.

Frank Willson
Email:frankwill91@yahoo.com