Venture Finance

Tim Bray explains venture finance.

I don’t know if I’ll ever go after VC funding again; I’ve nothing against the idea in principle, although the practice is often unpleasant. But if I do, and if I get a term sheet, and if we manage to negotiate away the differences, I’ll say something like this: “OK, it says here that you give us the money and you get this many points in the company plus your terms. How’s this: I’ll give you ten more points for the same money, but you take common shares and we’ll really be partners. Deal?” Then you’d find out if they were really entrepreneurial.

For the reasons he cites earlier in the post, investors and entrepreneurs aren’t always on the same side of the table. It’s that golden rule in action — “he who has the gold rules”.

The Underhire

Ross Mayfield comments on Heidi Rozen’s reflection about the impact underhiring has on a startup’s potential success.

Amen. In my experience, many start-up CEO’s can’t believe how much time it takes to get the hiring right. It’s consistently underestimated. And, following a bad hire, the time lost to correct it is also way too long. I can’t remember anyone saying “Gee, I really wish I had waited a while longer before letting that person go!”

After the Term Sheet

An article in this morning’s Wall St. Journal pointed me at this recent white paper titled “After the Term Sheet – How Venture Boards Influence the Success or Failure of Technology Companies.

Mr. Levensohn, who cowrote his report with corporate-governance expert Dennis T. Jaffee, says the misalignment of interests has evolved into a “major problem” in Silicon Valley. When early and later investors have different financial concerns that don’t align, they must resolve “difficult competing agendas” that can either deadlock or severely compromise the company’s future, the report says. Such “financing engineering” is no way to build a company, contributors to the report say.

Selection of investors — by both the entrepreneur and, indeed, by investors themselves looking at each other — is critically important to shared success.

Social Networking

Just took a quick look at — after reading about Mayfield funding them and having a friend tell me I should consider starting a tribe. Fascinating — or, rather, amazing. Social networks — the whole genre feels like a bubble — but, then, what do I know? “The Internet changed everything.”

I was involved for many years with CompuServe’s online communities — quaintly called “forums”. Looking at what Tribe is doing, it’s basically at its core just a discussion forum — with revenue generation coming from advertising listings sold within each of the communities.

Back in the heydays of CompuServe forums, forum managers participated in the revenue generated in their specific community. Does Tribe offer the same kind of deal to Tribe moderators?

What goes around, comes around. There’s nothing new under the sun, etc. I wish them well and hope the founders and Mayfield make a gazillion dollars on this play. Maybe Google will just have to own Tribe? If not Google, then it must be Yahoo?

Meanwhile, I’ve yet to sign up. My needs for community are being met in other ways.

When the Risk Takers Come

When the risk takers come into their own – John Cook writes in the Seattle Post-Intelligencer:

Despite the uncertainty in the current economic environment, a number of entrepreneurs and VC investors are convinced that now is an auspicious time to start a new venture.

Notes one VC: “Only good sailors go out in stormy seas. The teams and the people who are willing to head out with a new enterprise right now are good people to invest in.”

In fact, some investors point out that three current technology behemoths˜Oracle, Microsoft, Sun˜were all started during a down technology cycle. The article includes a review of potential advantages for a business started during an economic downturn (e.g. less competition, greater access to intellectual capital).