I think Fred may be right about this adolescent stage of investing being the best. But not because I think there is a bubble on the angel side; rather I think there are just a lot of stupid people throwing their money away. I think the situation is more analogous to playing poker with a bunch of morons who are pushing the good players out by betting at random. However on a whole the good startups are only somewhat overvalued, perhaps to the point where rational people may be hesitant to invest, but not to the point where there is some crazy speculative frenzy.
A few observations from the trenches (in the last 6 mos having raised $, TechCrunch+ BBC launched, been through YC Summer 10, lost a cofounder, continuing to work with pivot)...
1. The ugly adolescent stage also includes significant pressure from early investors testing founders/founding teams considering early 'talent acquisitions' as a potential out. If you're considering this, and it seems tempting, don't immediately run from that realization.
Sit down, take time to think about why it's attractive, and whether or not you're the type to take it or stick things out. Do you want comfort and some security at this stage or more risk? Are you willing to change painful parts of yourself? In short, are you willing to do anything to make it work? This is a vital question that will only become amplified as the stakes get higher if you succeed and the company grows instead of closes up shop.
2. If you've got pros investing in your seed/angel round - and hopefully you do -chances are they already consider that money gone, so if things go south in the terrible teen phase, unless they see serious potential/saving grace you're not likely to get an inside round. You've got to be showing serious gains, stamina, or ideally both to secure this support.
3. This means the biggest asset in the startup at this phase is probably you - the founder or founding team - unless you've got some amazingly patentable/defensible tech, which, let's face it, we're not seeing much of in today's startup world. Not many VCs are funding crazy-big concepts either...they feel burned by the lack of returns in the consumer internet space, and who could blame them? Think of yourself and your cofounders this way. Stay healthy. Stay sane. Get more sleep. Drink less of every substance but water.
4. Investors will use this stage generally to feel you out and figure out what you'll do, how you'll evolve (or not) when you really begin to show the strain of this phase.
Keep in touch. Do NOT drop off their radar. Continue to plug away at the product road map as much as you can. Show adjustments. Openly voice lessons learned, realizations, but careful about doing the same with doubts. They should be voiced to your reflection in the mirror, your priest/rabbi, your counselor, and maybe your dog, not your funders.
If you DO make the mistake of falling off the radar or voicing doubts, the good news is you can still recover if you have the kind of relationship with your investors where you're on a first name basis and they'll meet you for a drink or dinner anytime they're in town. Don't give up if you've gotten this far, feel burned out, but still can't countenance giving up.
Once you've started down this road, no one who has invested in you wants to see a young company in trouble fail, except maybe your competitors. Use your investors as assets, not just piggybanks.
5. Prepare to field inquiries about how you'd feel about being replaced or bringing in 'more experienced executives' with 'more credibility.' These questions will come from family, mentors, investors, advisors, friends, and your own psyche.
Sometimes this means your funders think you can't do it alone and you're not evolving fast enough as a founder. Often they're right. Often they're not. It's sort of a crapshoot figuring out which scenario you're in.
Again, this is something vital to examine about yourself. If you put the company first, you'll be willing to do almost anything to save it, including bringing in another CEO. This is another thing you must know about yourself as a founder at this stage in order to move forward.
If you want to stick it out and evolve, consider making a list of your pluses and minuses, your daily habits, your work + success metrics, and renovate the hell out of them. I'm now learning Photoshop, Python, and taking Stanford's CS106 class as non-coding founder. I'm also sticking to a new daily schedule that will enable me to get through 6 mega goals (3 personal, 3 professional/product) in 30 days.
If you are not willing to go through this kind of effort as a founder, you probably won't survive this phase and should look for a 'safe' landing.
6. Shuffling of cofounders also often occurs here, when the founding team is replaced by 'experienced' managers, or b-school friends of someone at the VC firm, or even someone within the VC firm who likes the market space.
Your cofounder might also leave. YOU might be the cofounder who leaves and goes back to grad school, gets married, doesn't move to the Valley, etc.
Try not to fault your cofounder - or yourself - overmuch if one of you leaves. I wrote up a long essay on how to handle this if anyone's interested. The situation sucks. Successful cofounder breakups are rare, but they do happen.
The good news? You can get through it. So can they. So can the company. Stay in CLOSE touch with investors during this period. Always have a plan, even if the plan is changing day by day. Communicate monthly at minimum.
7. If you don't think you'll make it through (and this feeling occurs often EVEN if you decide to keep plugging away), the founders who are relieved to some sort of dissolution or replacement occur at this early stage have many options open.
After a period where you might feel disillusioned by the startup world and go to work within another company you can still do another startup. Even if you fail, and a VC/angel likes you, they may fund your next effort. I've been amazed to see this happen with friends who drove a first or even multiple startups into the ground after early successes.
Don't burn bridges to good people with self-indulgent behavior like feeling sorry for yourself about fcking up. If you have to wallow, take a week, or a month, or a quarter, straighten yourself out, and then get back to work.
8. Even if you fail here, you're still an asset as an experienced founder who got something to market and got some money in the bank.
So it also pays for VCs and investors to track these founders as they leave and go to work on other startups or within organizations, because if they stuck it out to that stage they may be valuable to 'recycle' back within the ecosystem at some point in the future.
9. Your fellow founders/entrepreneurs may also be watching you like hawks at this point with a strange mix of emotions.
First, some of them probably don't like you, consider your skills beneath theirs, or never thought your product was that great. These founders are few and far between, but they can be incredibly useful. Ignore these folks until you can talk with them rationally about your failure. Then meet and get really* harsh and honest criticism about the product, danger signs, outcomes, and their opinion. Hopefully they don't feel too sorry for you and dump really good data that will help if you want to start again. In the best case scenario you convert them to supporters. In the worst case you remain frenemies.
There's another class of idealistic founders who really, really do NOT want to entertain the thought of failure. They will be praying you succeed and pull through, especially if they supported you, because to entertain the thought of YOU failing means they might - at least tangentially - entertain the possibility that they might fail, even if their companies are further along.
They will not like doing this. They might stop responding to your communications. This is a pretty terrible feeling, but also pretty good sign that you're deep in the trenches and people are waiting to see if you sink or swim.
The last class of founders will be watching to see if you fail because they might want to snap you up. These folks will usually respond enthusiastically to your requests to meet up, or they may want to meet you.
This will occur if you're awesome, regardless of whether you're an engineering or design or biz founder. Be prepared. Feel these folks out and ask about 'opportunities.' Usually they'll let slip they're looking (or they have a buddy that's looking) for someone like you. You know, "if things don't work out."
If an opportunity sounds awesome to you, consider it. Even if you turn it down you'll know more about what you want and what you don't want, which makes you a stronger founder.
10. I can't say this enough...Founder talent is rare, and VCs keep an eye on this as a developing market. Successful founder talent (in terms of winning big exits, etc) is far rarer, but sometimes a decent or 'ok' founder can be placed with a different co-founding group and be more successful the next time.
Even founders who flat out fail at this stage and drive their companies into the ground by failing to 'save' them may succeed again at different startups, or they may welcome the separation as a chance to renovate their original existing idea and start hacking away at the same problem integrating lessons learned from failure.
The mess, however, is also where founders who decide to stick it out learn invaluable things about themselves, their cofounders (if they make it through together), and their business, whether they ever secure another round for that company or not.
Vision - 5 years: Want to see an activity commerce market grow out of existing social commerce/health site models + activity data + geolocation, other data.
Intrinsic incentives for behavior change work less than 10% of the time, but current rewards are cheesy. I idealistically hoped 'social proof' and motivation using your existing social networks would be enough to incentivize not just a 1x healthier act, but repeated and routinized behavior change.
Unfortunately learned over a year of getupandmove/imoveyou this doesn't work well, and even the most motivated users drop off. Lots of room for problem-solving here, but hard to not lose first mover advantage or be cloned.
Goal: Your action should be able to provide currency, literally and figuratively (points earned for calories burned converted to rewards/reductions in insurance premiums, which lots of new folks are working on).
Business model was this:
1. Sponsored campaigns for hospitals, health insurers, etc. (more social media than action - quant measurement of success was impressions). Enterprise model w/campaigns between 15-250k (we hit the low end but not the high end).
2. It was "Evite for healthy actions."
3. It was easy but time intensive to sell here given connections/experience in the space, but we spent a lot of time and human capital working on a glorified consulting model, even though we were successfully able to sell/close enterprise partnerships quickly (less than 12 weeks). Not scalable. Also, we found out we sucked at user acquisition with the direct-to-user model, and never 'went viral.' Our growth graph has a nice steady up and slightly to the right trend with no hockey stick in sight. Enter pivot.
Business model post-pivot:
1. Verify activity. Become middleware layer for 'proving' someone has done action or challenge using different types of data (example: geolocation, social proof/logins, accelerometer/fitness devices like FitBit).
2. Offer the verification to partners with potential for big distribution rather than go straight direct-to-consumer. Use founder strengths in this area.
3. It "will be" Paypal for verified health/wellness activities (individual and group).
Business model includes percentages of these factors which evolve over 2-3 years:
1. Sponsorship/campaigns (50% first year)
2. Lead gen (% cut; 25% first year)
3. With verification, conversions/cut of per action market completion + purchase, especially where actions include purchase of item.
My uneducated opinion is that this is very tough to accomplish, and if you guys pull it off you will have built a great company. It seems you guys are in the preventive healthcare business.
On friends: I doubt friends are helpful here, unless they are friends I see daily and take/compare actions with. Plus if I drop they will just support my new decision, or they may not even notice. I am sure you guys will figure something out here.
On rewards: Providing currency is a great idea("lower insurance premiums..."), but just knowing I am taking care of my body is a greater motivator than saving "15% on my car insurance", I mean my health insurance.
On product: It's nice that I move you, but really I want to move ME. Ideally I would want ImoveMe to be a product where I can have my health-related goals, then it will help monitor them. Better than connecting with my friends on FB, I would rather connect with people who have similar goals then compare progress. A friend who does not jog cannot motivate me enough to wake up at 6 AM and go for a run.
On product 2: Challenge your Twitter and Facebook friends to small bursts of exercise. . Well you know what, why can't IMyou (or me) challenge me? If I tell you my goal is to loose weight, then be fun and turn this into a game. SMS me random burts of exercise to do, or email it to me in the AM, and once a week send me my diet plan. I can SMS back "DONE" then you can give me points, I guess. I cannot afford a personal trainer, but you know what, reading instructions is just ok. Plus it's a game. This game is my boss and tells me what to do. If I fail to text back DONE after x times, sign me off the service and ask me to come back when I am serious.
Again, this is my uneducated opinion about a business I have looked at only for a few moments. That being said, I watch the CEO interview on TC and she seemed hella-passionate, so I am confident she will solve this issue for all of us.
We are doing many of these rounds as inside rounds, meaning the existing investors are funding the company without a new lead investor. I see this as a big opportunity for our firm and I am excited about it and entusiastic about making these investments.
What I don't see is a lot of firms interested in leading these messy middle stage rounds as a new lead investor. I'd like to see more deal flow from other VCs at this stage because I think this is where you want to be in the VC busines right now. I think you want to invest in the mess.
Hrmm, so which is it? The blog seems to have some really mixed messages. If you're excited and enthusiastic about keeping portfolio companies close then why would you want more outside led rounds? Just for the validation?
It is hard to not read this as a plea for more risk sharing in ongoing financing so that they can allocate more money elsewhere - like the overly frothy early stage market the reader is instructed to avoid.
