New Starts for a New Year – Becoming an Entrepreneur

by Bradley Miller on January 6, 2010

In the past I wrote about getting a start-up off the ground. More precisely, about how to take an idea and give it legs and maybe get it running – how to mold an idea and begin to improve it. I call this socializing the idea (with the next steps being socializing the company/concept). But, how do you take it to the next level? Making that transition between idea to fully operating start-up is tough, particularly if you’ve not done it in the past (read: if you haven’t been a successful entrepreneur in the past).

A good friend, who has successfully sold two pretty large start-ups, gave me the advice that angel (or seed) investors tend to only invest under three conditions: 1) you’ve been successful in the past, 2) they know you personally (worked with you, are a family member, want to get in good with your family, etc), or 3) are intimately tied and invested in the space you’re working in. While I took in his advice, I’m not sure we followed it well in my first start-up. None of us in the venture had successfully launched a start-up, we didn’t come from money and most investors didn’t like to invest in the healthcare space (at least at the time). Turns out my friend was more right than I could have guessed. This made it incredibly hard to pitch to angels, and ultimately we didn’t get funding (but that’s another story).

One other thing about starting that I’ve learned over the past 4 years is that often times it has taken companies a lot more effort than they showed or they had some sort of secret weapon to getting started. Almost no one company starts go smoothly or easily. One company in particular that comes to mind was lauded as having been an amazing story and elevated its founder to a great reputation. They raised a little under a million dollars and sold for $25M. That’s a great story. Then you peel back the layers back and realize that one of the co-founder’s father invested a majority of that initial $1M (they didn’t raise it from a typical angel investor) and that father was also an executive at the company that eventually acquired the start-up. Don’t get me wrong, this start up still took a tremendous amount of work to get the product to grow and to accumulate users. But, as a note to up and coming entrepreneurs, stories like this one, including the message that was told to the public and meetups regarding the ease they had fundraising are often misleading. It’s still a success story, but definitely not as shiny as it initially seemed.

indexBut where does that leave first time entrepreneurs without a track record or the good fortune of befriending a Silicon Valley maven or a PhD in computer science? A couple new efforts have really filled that niche for talented, but new entrepreneurs. The most well known and a pioneer of these efforts is Y-Combinator – a Silicon Valley and Boston based effort that hold biannual “try-outs” for new start-ups. Essentially, you make an appointment for the try-out session, pitch to Y-Combinators’ board and if they like you they’ll give you some minimal seed funding ($10k) and help set you up with the resources you need. More importantly, being accepted as a Y-Combinator company pulls you in to their social circle which works wonders in being connected to partners, customers, getting advice or going for a larger funding round. Perhaps most important in this effort than having a great idea is who you know and who you have access to – funding from Y-Combinator can help you gain that toe-hold and help you jump in to the game. They also have great partners, including Paul Graham who has a widely read start-up blog. In other words, it’s less about the amount of funding and much much more about the connections being one of their companies brings you.

www.founderinstituteNow, utilizing efforts like Y-Combinator doesn’t come without a price – namely that it’s reported that they take 10% of equity in a company. That’s definitely very, very expensive. However, at the same time it’s indispensable if you are new to the start-up game, particularly in the Bay Area. Other, less well known efforts are also taking root, including Adeo Ressi’s The Founder Institute. Their model is a little different – they take a smaller chunk of the company if it gets funded and then splits the profits from this equity pool amongst other founders. It’s too much to really explain here, but suffice it to say that the Founder Institute is more about gaining connections than anything else.

Dogpatch LabsA third option is a location in San Francisco named Dogpatch Labs. Run by Polaris Ventures, Dogpatch Labs gives entrepreneurs very inexpensive, shared workspace with other start-ups. It’s more about community and connecting with your fellow entrepreneurs, but it’s also a great networking tool. In this case, entrepreneurs and young companies need to pony up some cash for the space, but in a place like San Francisco, a resource like Dogpatch Labs is invaluable to the start-up community.

iologoLast and certainly not least is i/o Ventures. Just announced today (January 6, 2010), i/o Ventures looks to be both a small seed round along with a new, open workspace in SF. It’s got an impressive list of advisors and other folks surrounding it, including the likes of Michael Arrington. Pretty amazing exposure and a mashup of some of the concepts from other incubators/labs. Sounds like they’ll be shelling out more money for a smaller percentage of the company as well (compared to Y-Combinator’s $10k and 10% take). Watch out for these guys in the future.

Overall, these efforts give an amazing amount of camaraderie, work space, inspiration and most importantly legitimacy in the eyes of potential users, customers, and funders. It’s a fantastic way to start if you’re new to the game. I’m sure there are other spaces like these, including Hacker Dojo in Mountain View, CA – more of a meeting of the minds and place for work inspiration and perspiration. Did I miss something? Who else should be included in this list? Leave a comment about them below!

{ 5 comments… read them below or add one }

WRM January 7, 2010 at 11:03 am

“very little left to chance” turning an initial $1M into $25M?

I have to disagree with your statement that because an individual started a company with help from family interest in the business, that very little was left to chance. Now, I do not know the intimate details of the business, but turning $1M into a business that sold for $25M is no small task. Even with proper guidance, support, and financial contributions there has to be thousands of hours of hard work, intense preparation, and strategic execution to make that type of profit. On top of those element what about the initial ‘big idea’ that started the entire plan in motion.

Being able to double your money let alone multiply your money 25 times in the current economic environment is an extremely daunting task.

I am not sure that I know of one success story where the successful person didn’t ask for help. Even if this success story was an ‘inside job’ from the beginning, the individuals involved where extremely successful in setting up and executing towards their ultimate goal, which I would assume, is profitability.

Bradley Miller January 7, 2010 at 4:17 pm

Thanks WRM – I agree with your comment that turning $1M in to $25M is a great feat, no doubt. What I was trying to say, and maybe this needed more explanation, is that this particular entrepreneur only ever talked about the $200-300k that he raised from seed funders AFTER he already got $500k+ from his partner’s dad – he never mentioned that the first $500k was a slam dunk while presenting himself as someone who started with nothing. For those who’ve started (or tried to start) a business, getting that initial investor (truly starting from scratch without these types of connections) is one of the hardest parts.

Again, turning $1M in to $25M is a great feat. What I was implying in this story/anecdote is that this seed investor put his own money in, took a back seat, and then went to his company and got them to pay $25M for this business – $25M during an up time when money flows more easily (and valuations are higher). Sure, this is smart on the investor’s part, but disingenuous and misleading when presenting itself as a huge, pull yourself up by the bootstraps effort and success story. At least when you’re trying to give advice to up and coming entrepreneurs, which these guys were doing. The fact that it was a 25X deal (vs a 5X or 100X) is irrelevant. The point was that if you’re looking to other success stories, beware that there’s probably a whole lot more going on than what is presented in public.

If you have those connections, by all means use them, ask for that help. I certainly would. All I really meant to rhetorically ask is that what if you don’t have those types of connections? What can you do to begin to get traction without being misled by disingenuous advice? Lots of folks run in to this very issue.

Vinnie January 7, 2010 at 4:44 pm

Brad, really great post, you’re 3 conditions for angels I think hit it on the head, I know a number of people that try to curt that but haven’t had much success.

Really nice job on describing all the creative options available for seed investments and cool working spaces.

Raymond McCauley January 20, 2010 at 7:37 pm

Brad, fantastic round-up of startup resources.

I wanted to add one to your list: BioCurious is an life sciences-focused incubator and shared lab space in Mountain View. They’re similar to Hacker Dojo and SuperHappyDevHouse in being inexpensive and a great space for networking, but they provide actual laboratory equipment, like a TechShop for biotechnology. Eri Gentry, a BioCurious founder, is really interested in bring together a community of entrepreneurs, hobbyists, citizen scientists, biohackers, and practitioners of synthetic biology.

Startup costs have always been a limiting factor for biotechs that do actual lab work. This model looks promising for helping very early stage folks get through that barrier.

BioCurious is sponsoring the upcoming DIYbio meetup on Saturday, 23 January 2010. Good chance to see the space and meet the people.

Nikhil Chopra February 10, 2010 at 5:40 pm

Very good and informative post!

thanks

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