
Why They Were Able To Raise Money - jasonlbaptiste
http://jasonlbaptiste.com/venture-capital/why-they-were-able-to-raise-money/
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Sukotto
I have GOT to stop reading these sorts of articles.

 _They_ make it big because _they_ are networked with the sorts of people who
have money to spend (either by being a former employee of an acquisition-happy
company, or being pre-vetted by a group like YCombinator). Based on other
articles of this type, _they_ also make money because they are young, they are
pretty, they went to Stanford or MIT, they live in Silicone Valley, they had a
good idea, they were able to pivot in just the right way, they have no other
commitments -- no spouse, no kids, no mortgage -- or ties, etc...

Sure, _they_ "worked until they endangered their health".. but _they_ were
also the lucky 0.0001% that had everything else line up so that hard work was
all they needed.

Reading this sort of thing is a drag for those of us who do not have any of
those advantages. Who try year after year to support a family and also find a
business that can actually work out. (got another idea last week... looking to
feel out some potential customers ... wish me luck!)

So, uh, yeah.... I should stop reading these kinds of articles

~~~
mattmaroon
He isn't wrong though. That is a pretty good list of reasons why a large
funding round may have happened. They aren't requirements, but they do all
help.

The good news is that none of those things ensure a large funding round, and
also that large funding rounds aren't needed for a startup to succeed. I don't
think anyone would suggest that you shouldn't start a company if you can't
check three of those boxes. But you probably shouldn't start a company that
needs a $20m Series A just to have a shot.

~~~
axod
Also depends on what you consider 'startup success'.

Many of the startups we hear about being acquired doesn't really mean they
succeeded. Only means the founders/investors were able to make a quick buck
from someone willing to buy it.

It must be quite a 'hollow' success to cash out selling an unproven business
model to some bigco.

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jonpaul
Ya, but what I don't get is why an iPad app needs to raise $8 million or why
Slide.com that just sold to Google for $180 million raised $87 million. I must
be missing something? Does most of the funding go to marketing, engineering,
what?

Will someone shed some light on this?

~~~
mattmaroon
There are a number of factors.

1\. As PG points out, startups are sorta pass or fail. If you could raise $1m
for 25% of your company, or $8m for 25% of your company (which, btw, is a
realistic possibility when comparing angel vs VC investors) you would take the
$8m because your business has much less chance of going broke. Clearly I'm
simplifying here, as there are a lot of other relevant factors (who the
investors are, terms, the needed valuation for an exit afterward, etc.) but
you get the point.

2\. They probably have a lot of ambition. In the case of Flipboard, my guess
is they're not thinking "we're just making an iPad app." They're probably
setting out to change the way people interact with social media, and the iPad
app is just the first step along a very long road.

3\. Peace of mind. As an entrepreneur I can tell you, there's something very
nice about knowing you're not going to run out of funding for awhile. Everyone
breathes easier, and it lets you take bigger gambles when not every product
has to be a winner. If you're already wealthy from a previous startup, and
you're shooting for a massive exit, your path will involve hiring a lot of
people and possibly a large marketing budget. To not have to worry about money
requires raising a lot. (This is one of the primary advantages, for first
timers, to raising angel money. They don't need an IPO increase their net
worth by a factor of 100.)

4\. It's what worked for them before. The companies that merged to become
PayPal presumably raised a lot along the way. I know TellMe had one $47m
round. When people raise a lot of VC money, then have an enormous exit,
they're probably going to tend to do the same again. It's what they know, and
they have empirical evidence that it can work.

5\. Because they can. That shouldn't be a reason, but it definitely is. A big
VC round is the startup equivalent of a trophy wife.

~~~
sbaqai
Another reason could be this:

My understanding is that most PE/VC funds typically have a "2 and 20"
compensation structure. 20% of profits, and 2% annual fee on _committed
capital._

That incentivizes, regardless of performance outcome, committing as much
capital as possible.

~~~
mattmaroon
That combined with taking board seats (which is why it's better for a VC to
put $20m into one company than $10m into 2) is why VCs want to fund big
rounds, but founders don't have any such incentive to take them.

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ojbyrne
Its the wrong answer as to why digg was able to raise money. While Kevin's
reputation may have led to growth (given that he was a cable tv host at a just
purchased network that was going through multiple rounds of layoffs, I would
find that suspect), the real reason was traction. Growth was crazy.

~~~
jasonlbaptiste
Agreed. It was meant to be one of many reasons Digg raised money with "Intense
Growth" being the main one. I feel the reputation was exactly what you said:
what lead to growth /started the fire.

~~~
ojbyrne
Actually upon further thought, you're sort of right, but you got the wrong
person. Jay Adelson had already produced a big exit, and his reputation was
probably key in raising money.

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jasonlbaptiste
To sum up Digg:

Jay brought: great track record with equinix and strong reputation amongst
investor community.

Kevin brought: strong reputation in the tech community that lead to intense
growth.

~~~
ojbyrne
I somewhat disagree with the Kevin's "strong reputation" - he had an audience
for sure, but I think his reputation wasn't wholly positive. He'd done startup
type things before that went nowhere.

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pvg
It's interesting that none of these criteria directly mention 'they built
something useful'. Shoot for building a useful thing. If you pull it off,
you'll be namedropped in blog posts like these for all the wrong reasons.

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mattmaroon
I didn't really care for Flipboard very much. It's really nice looking, but it
just makes the information I want much harder to get to.

~~~
rpledge
I agree. It's fun to play with at first, but besides looking cool, it doesn't
help with navigation at all. I would be interested to know if they are seeing
a drop off in traffic yet. Besides, they'll likely get smacked down hard for
scraping content. They did a great job getting press for launch (I wonder how
much they paid Scoble?) but I can't see them returning that $10 million unless
someone acquires them.

~~~
mattmaroon
It's VERY hard for even a paid iPhone app to make enough money to justify a
large enough sale for people who invested $8m into a company to give the go
ahead. Maybe impossible. A free iPad app is orders of magnitude away from
that.

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nostromo
It's interesting to show a picture of Kevin Rose in this article without
mentioning him beyond one paragraph. I re-read the article trying to find
which "checkboxes" allowed Digg to raise so much money.

~~~
jasonlbaptiste
I almost linked to that article. I always found that picture from 2006 was the
poster child of: "holy crap this web stuff is so easy, and so is that
fundraising stuff!"

~~~
nostromo
Note to self: never let a press photographer put earphones on you, turn your
hat backwards, and suggest you give double-thumbs-up. You'll never live it
down.

~~~
joshu
I was in that article as well. There was a lot of lying all around.

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anon_1234
Do you think that cultural or socioeconomic issues play a role at all?

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joshu
there are negative reasons, too. deals get overheated all the time. vcs
patternmatched too hard. etc.

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joshbert
Another home run. I'm really taking a liking for Jason Baptiste's style.

Having said that, I'd be interested in more articles on how to gain traction.
The last one ([http://jasonlbaptiste.com/featured-articles/if-you-build-
it-...](http://jasonlbaptiste.com/featured-articles/if-you-build-it-they-wont-
come/)) was incredible, and it definitely left me wanting more.

Thanks, Jason.

~~~
jasonlbaptiste
You're welcome josh :). I sincerely love writing this stuff (more than
startups themselves sometimes). I was thinking of doing separate posts on PR,
Marketing, etc. for startups. Some I know myself and that which I don't I'd
heavily research further. Open to suggestions.

~~~
joshbert
That sounds great. Maybe focus on the topics you're more knowledgeable in and
then expand upon concepts you're not 100% familiar with? I would certainly
love a series on Marketing & PR. Specially for startups at pre-launch stage.

