52 Bicycles

Paul Graham does it again with How to Fund a Startup. Great advice on where to go when. Read it now if you haven’t already.

I am a frequent attendee of the MIT Enterprise Forum Startup Clinics. They’re a great, cheap way to learn what the venture investment community is thinking. But on average, the presenters are way too early for institutional money - they would be much better suited to 3F or angel bucks at their stage, then achieve revenue and hit the investment market. And that’s what Paul recommends - I can only recommend that you read the whole thing.

Now, there are institutional investors out there that claim to fund pre-revenue software plays. But I look askance at taking up on this offer for two reasons. First, by opening the floodgates of pre-revenue firms, the fund is going to see an additional hundreds - maybe thousands - of opportunities every year, which even if they do 100% pre-revenue, will be a very small percentage, perhaps under 1%, of the deals they see. So the odds of being in the “win” category are even worse than at the later-stage (which are still “early stage”) “A Round” firms.

Second, having revenue is going to be a competitive advantage for winning the deal, even if the fund claims it wants pre-revenue plays. So go to the other, more appropriately early sources for the pre-revenue money, then look to other stages when you meet the criteria not merely to be considered, but to blow away the other deals they might consider.

This last point is key: it’s only in that slam-dunk situation that the percentage likelihood of success breaks into the double-digits, because by the rule of large numbers, thousands of deals will mean dozens of slam-dunks, of which they will invest in maybe six or eight, if they’re having an exceptionally frisky year.

If venture money falls in your lap, that’s one thing. But if you just have gotten a meeting, even a “positive repsonse”, by the percentages it’s stil a hail-mary pass. And I don’t know of many successful football players who make those at the start of the game.

Profitable growth must be the mantra of the early software enterprise - make a lot with a little.

This entry was posted on Thursday, November 17th, 2005 at 11:15 pm and is filed under Technology Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. Reddit This