The journey through that wilderness isn’t without the occasional victory. One of the earliest inflection points of a start-up is securing that first round of outside investment. Right as the entrepreneur has almost topped out their credit cards, exhausted their savings, and been banned from family dinners due to borrowing from relatives… the oasis appears!

In the life of a start-up, there are few events more exciting than raising the initial round of funding. This initial round, often called the seed round or seed capital, is some of the most critical but most difficult to raise. This money goes for flushing out the business model, building the prototype, protecting the intellectual property, getting critical market validation, and beginning to generate early adopter revenue.

In addition, it marks an important point in the entrepreneurs maturity. They’ve probably gone a few months without an income… and outside investors mean an actual paycheck. It feels so good, they won’t even care that the salary is 1/3rd what they could earn in corporate America.

Unfortunately, there is a problem with securing seed money. The risk and lack of revenue associated with a seed investment is a turn off for most institutional investors, and most high net individuals are too busy investing in real estate (or maybe that’s just in East Tennessee?). As a result, many potential entrepreneurs lose hope, run out of savings, and eventually throw in the towel. While this lesson is critical for technology start-ups, it happens across the board, from lifestyle, to serial, to social entrepreneurs. Academics have identified a funding gap between traditional venture funds (which focus on growth and expansion opportunities) and seed investments.

In order to be successful at raising seed capital, and to avoid major complications in later stages of fund raising, entrepreneurs should develop a fund raising strategy. The idea that “all money is good money” is a bad idea that gets good entrepreneurs into horrible, dead-end situations. Remember, there is no such thing as a free lunch… so consider the conditions (both legal and implied) that come with every outside dollar you raise. Make sure every dollar raised creates the kind of value that grows the company beyond seed and into the growth stages.

Some points for consideration are as follows:

Seed Stage Funding Sources:

• FFF– The classic friends, family and fools. Unless an effort is backed by a research institute or corporation, most start-ups rely on founder’s capital and resources to get the concept nailed down, technology flushed out, and business plan pieced together. It can be very beneficial to be an early investor, since this money gets to experience the most value gain over time. Likewise, early investors typically get diluted (or see a decreasing stake in the company) with the entrance of larger institutional players. That’s usually okay, though. Institutional money can make the difference between owning 20% of a hot dog stand of 1% of a MacDonalds. Be careful with FFF and how the deal gets structured. Later in the companies maturing, it will be tricky to raise money if the earlier investors are at odds with potential future investors.
• Grants– Free money! Well, mostly free besides the time spent battling the annoying application process. Common resources for grants are federal grants like the Small business Innovation Research grant. Aside from providing capital, these awards are 3rd party validation for the concept.
• Boot Strapping–Boot strapping is the funding strategy for most non-serial, non-technology entrepreneurs. This is a great way to establish a lifestyle company (one with no desired exit, but with intent of operating under founder’s control to provide income for a certain lifestyle). As revenues grow, the company is able to increase its relationship with the bank, throttle up cash flow, and expand operations.
• Angel Investors–Angel Investors come in many shapes and forms, which makes it difficult to understand what someone means when they claim to be an “angel investor.” Also, there are lots of decoys out there… people claiming to have access to angel money but with no real ability to invest. Depending on what the angel brings to the table, the deal should be assembled accordingly. An angel with industry experience and a willingness to serve as an adviser or board member should have more seniority and stronger investment rights. An angel without the resources or acumen should be treated as a typical FFF investor. Some would even argue that angels without special resources or acumen aren’t really angels… they’re really just part of FFF fund raising.
• Institutional Seed Investors–Before its all said and done, almost every technology start-up needs some kind of institutional investment. Institutional investors are the true commercial venture and private equity funds. Venture and private equity money is supposed to be “smart money.” Be careful… there are many groups passing themselves off as venture funds without the resources (and most importantly capital) to support their claim. A real institutional investor will have provide the start-up with access to their network (both industry specific and fund raising), provide operational value as an adviser or board member, and be able to offer fresh and relative opinions.

Concerns:

I can’t believe I’m making this recommendation, but when it gets time to negotiate the terms of a seed round, I recommend the entrepreneur bring their own lawyer to the table. Certain lawyers specialize in business formation and investing, so they have the acumen necessary for writing the appropriate investment documents.

• Valuation– This needs to be a post all its own. Raising too much money or at the wrong valuation cause cause major problems in the long run. The most frequent mistake of naive and rookie entrepreneurs is trying to raise money at too high a valuation. Typically, $500k seed investment in a company that is pre-revenue, pre-prototype, and pre-IP (patent) is going to purchase 35% to 45% of a start-up. This isn’t written in stone, but its a good starting point for negotiations. The longer the company waits to raise seed money and the more value squeezed from founder’s capital, the better the valuation. For example, a company raising a frist round of seed money that already has a patent filed, a prototype built, and recurring revenue off a small number of beta customers is going to give up much less than a company with only a business plan and pitch.
• Anti-Dilution– Some companies are tempted to include an anti-dilution clause, which is a BAD idea in my opinion. Early ivnestors should have tag-along rights (or the option to invest pari-passau) with future rounds. The harsh reality is that most early investors, won’t have the cash reserves to follow-on with later institutional investments. As the multi-million dollar investments close, ownership percentage becomes diluted for both early investors that don’t participate and founder’s equity. This is natural and to be expected, so entrepreneurs should manage expectations with the FFF. Like I said earlier…. 10% of a hotdog stand or 1% of a MacDonalds.
• Investment Tool– There is much debate around what type of tool to use with seed investors. Typically, investments are made as either common stock, preferred participating convertible stock (yeah… a mouthful!), or as convertible debentures. Personally, I think REALLY early institutional seed money should be raised as convertible debentures, founder’s equity should be treated as common stock, and only after revenue generation and market acceptance should preferred equity tools be used.
• Voting Rights–If you’ve ever heard the old saying that “a donkey was a horse designed by committee,” you understand the danger of having too many people involved in the company’s decision-making process. Giving voting and board seats to early investors can create complications and frustrations long-term, not to mention deter insituional investors. Some seed investors are of great value and should be awarded board seats, but in my opinion these true angels are rare. Giving Uncle Bob and your college roommate preferred voting status and/or board seats in exchange for $20,000 is foolish. Its one thing if they are industry experts… but giving them seniority because of their relationship is naive at best.

Check back soon for future posts on:

• Setting a seed stage valuation
• What happens when entrepreneurs do bad seed deals
• How to be attractive for seed fund raising

I intended this type of post to be the final in this series, but Mark Cuban has a small blog post about those five little words. In this post, he talks about how insulting and ridiculous it is to use those five words on a potential investor. He also implies that any entrepreneur that uses that expression is lazy. You know what? I kind of agree… but for kind of a different reason.

Let me clarify. I agree that any business plan should be concentrated into a focused pitch. Investors train their ears to listen for those pitches, and they have a list of performance indicators they hunt for in early conversations. Likewise, too many entrepreneurs are caught up in the wonders of their technology instead of the wonders of the value proposition. Use the pitch to focus on the customer’s need and your proposed solution. Let the prototype demonstrate the technical wonder of your product.

Also, I think too many entrepreneurs see successful fundraising as a roadshow. Just yesterday I heard someone talking about “running the gauntlet” to raise money. Personally, I think this is a very poor strategy for fundraising. Venture capital should be smart money… so focus your fundraising efforts. Identify the venture funds that have records of success in your area or an expertise you need. The VC sits on the board to do much more than just monitor the investment, they want to add value through their experience and network.

In conclusion, no matter how frustrating it may get… don’t ever use those five little words on an investor. You may think it is the best idea in the world, but if investors aren’t biting, it’s a good sign that you need to rethink your strategy. Ask yourself:

• Is your pitch communicating the right points?
• Is the idea justified by a market need?
• Have you honed in on a scalable value proposition?
• And are you talking to the right audience?

Hearing “no” shouldn’t be a death kiss for seed, growth or expansion money. It should cause you to revisit your assumptions and proposition. Entrepreneurship isn’t about being a sniper. Its about being a machine gunner. Keep aiming, but keep firing!

Update: Per a thought-provoking comment, I’d like to elaborate a little on my comparison to being a machine gunner vs. a sniper. In contrast to my machine gunner analogy, the comment suggests that a good entrepreneur would be a persistent sniper– aiming carefully, pulling the trigger, and moving on to the next target. I agree with this methodology as it applies to the day-to-day responsibilities of being an entrepreneur… but I’d caution using it as a product development strategy. With a sniper mentality, too many entrepreneurs develop tunnel vision and miss ancillary opportunities. They look for the perfect perch to fire the perfect shot with the perfect weapon at the perfect target. That’s like a web-based entrepreneur saying they’ re going to run in stealth mode until they perfect the product and land a contract with the largest potential customer in the space.

By being a machine gunner you keep your focus on the objective. Contrary to the Hollywood portrayal of the machine gun as a “spray and pray” tool, there is actually a degree of skill required for effective use. The machine gunner focuses on a target and lets out a burst. Then they refine their aim and let out another burst. They use this “aim, fire… aim, fire” technique over and over, until they’ve achieved the objective. That is the point. Entrepreneurs need to aim, fire… aim, fire… aim, fire… until they’ve achieved their objective.

Let me set the stage… I eat out pretty regularly for lunch. Sometimes its a lunch meeting, sometimes I need a change of environment, sometimes I don’t pack a lunch, and sometimes I’m just hangry (when you are so hungry that you get cranky and angry). I’m also pretty consistent in my decision-making and schedule. I eat at about the same time in the same handful of restaurants.

On this particular day, I went to lunch with two colleagues at a place known for its salads and salad bar. As we finished the meal, the waitress brought me a fresh drink in a clean glass. When I went to lift the glass and take a drink, the bottom shattered due to a cold liquid being poured into glass still hot from an industrial washing machine. Diet Coke went all over the table and all over me. I quickly grabbed some napkins and set about cleaning up the mess. The waitress ran over with her apologies and we worked together. While I wasn’t pleased about it, I marked this little incident up as a freak accident and appreciated the assistance of the waitress. From a learning and customer service perspective, this is where the manager had options…

I loved choose-your-ending stories when I was young.  Here are the two options:

Option A: The Wrong Way to Handle the Situation
At this point, the manager comes over to apologize. I appreciate the apology and wait for him to say “and for your trouble, let me get the check for the table.” Instead, he said “and if you’ll bring me a receipt, we’ll reimburse you for the cost of dry cleaning.” Feeling a little frustrated, I respond “reimbursement is what you do for employees, not for your customers.” Long story short, after some prodding and arguing, he takes the cost of my meal off the ticket but my colleagues still have to pay. We leave and go back to the office, telling everyone the story of how frustrated we were with our dining experience. This restaurant chain now goes on my list of undesirable options and is the subject of a negative blog post.

Option B: The Correct/Wow Way to Handle the Situation
At this point, the manager comes over with the employee and helps clean up the mess. The manager apologizes and offers to comp the meal for the entire table. Feeling “wow’ed,” we say thank you and leave a tip for the waitress. From there, we go back to the office telling everyone about our “wow” experience. We also go back the following week and have a laugh with the manager about the whole thing. Lastly, I write on my blog about how this was an example of excellent customer service.

Conclusion
As you probably expect, my experience followed option A. Not only was I sticky for the rest of the day, but I was also irritated by the lack of customer service in my dining experience. I felt much like MickJagger when he sings “I can’t get no satisfaction.” Option B would have cost the restaurant $15 more but bought hundreds of dollars in good will, brand image, and PR.

More so than just the restaurant industry, when little mistakes happen with customers, the best thing a company can do is own up to them and take the appropriate steps to make things right. At the end of the day, the brand image of a company is one of the most critical and valuable components.

Note: There are two hints on the identity of the restaurant hidden in my post… Can you figure it out?

When I first started blogging back in 2003, I was very active and well-read on politics. At the time I was living in south Florida, an area of attention for both local and national elections. Having volunteered and surrounded by it, I spent quite a bit of time writing about it. I love the American system of government and think writers have made been a major contribution to its strength. At one point, I even considered doing a joint Masters in Public Policy and Business Administration. As fate would have it, my life took a different turn as I watched people burn out and get passed over for consideration at the close of the ‘04 campaign season. I took my hiatus from politics and refocused my attention on business strategy and entrepreneurship, ending up in East TN with a MBA and career in community development venture capital.

Now its 2008, and I find myself being pulled into the wonderful pandemonium that is a presidential election year. I’ve been slightly adrift over the past few weeks, wondering what role I should play. After getting very involved with a primary candidate (and being left a little heart broken), I’ve kept my distance. This ends with this series of posts, categorized as Election 2008.

The topics I’d like to post are:

• The candidate I won’t vote for
• The candidate I will vote for
• What are my important issues for this election cycle
• Thoughts on the current state of affairs
• Review of the Bush administration

To be honest, I’m not sure how this series of blog post will be taken. I’ve found it difficult to have conversations about the upcoming election. I feel like the general public is broken into three categories: 1. Obama fan boys/girls, 2.  wandering hero-worshippers, and 3. a silent majority. Let me define:

• Obama fan boys/girls: Typically come from the young professional crowd that grew up on eco-friendly public service announcements, a healthy dose of racial guilt, and the sitcom image of a president. This audience is naive enough to believe in diplomatic talks, troop withdrawals, etc. They are also skeptical enough to think that America and/or its leaders are some how involved in most of the world’s problems and therefore responsible for fixing them (i.e. global warming, world hunger, etc). There is also the ever present intellectual liberal that in their wisdom can ”see some of the evil of capitalism and good of socialism.”
• Wandering Hero-Worshippers: These people cling to some former icon, whether it be Regan, Kennedy or even F. D. Roosevelt. In today’s political climate, these folks are looking for someone that seems to embody the vision of these gone servants. I guess I fall in this category… I’d vote for ghost of Reagan, ghost of Goldwater, or ghost of Buckley ticket. Secretly, I think most politicos are hero-worshippers.
• A Silent Majority: That’s right… I’m borrowing a term from Richard Nixon. The truth is, I do believe that the majority of Americans are hard working, down-to-earth folks that just want to live their lives. They don’t run around looking for things to be offended by, object to, or become zealots about. And they are confused. They are confused by the mud slinging and pandering of our politicians, by the complexity and spending of our government. They want something different, but don’t know the what or how. They need a hero (insert cliche ’80’s song “Holding Out for a Hero”)…

Now for a little humor…

I’ve decided to fill this gap in my literary experience. After some research and consultation, I decided on the following criteria for selection:

• Author must be from the American southeast or spent a substantial amount of time in the American southeast
• The author must have received a Pulitzer or be credited with developing a specific style of writing
• The writing must be a novel
• The novel must be set in the American southeast

As such, here are the authors and works on the list:

• William Faulkner “The Sound and The Fury” (Pulitzer– 1955 and 1963)
• Harper Lee “To Kill a Mockingbird” (Pulitzer– 1961)
• Cormac McCarthy “Suttree” (Pulitzer– 2007)
• James Agee “A Death in the Family” (Pulitzer– 1958)
• Robert Penn Warren “All the King’s Men” (Pulitzer– 1948, 1958, and 1979)
• Tom Wolfe “A Man in Full” (founder of New Journalism)

Consideration went to:

• Pat Controy
• Truman Capote
• Rock Bragg
• Anne Rice
• John Grisham
• Mark Twain

As a promotion for their upcoming comedy Tropic Thunder (yes, the film that has received some controversial attention due to Downey’s make up enhanced portrayal of a black man), the above-mentioned trio has created a viral marketing video on YouTube. This video had me laughing out loud in the office, and I had to share it.

Not to get too analytical, but the video does a handful of things that make it a good video:

1. Celebrities as off-camera people (the “Entourage” effect).
2. Slapstick comedy (the ”Jackass” effect) 
3. Spoofs pop culture.
4. Spoofs the whole idea of a viral video.
5. Includes a teenage kid.

Second, the lead rythym guitar and backing vocals is Brian Bell, a Knoxville native. I think this is very cool.

Third, the music video for “Pork and Beans” takes advantage of a very fun and promising marketing technique called viral marketing. The point of viral marketing is using word-of-mouth to grow awareness of a product or service. In this case, the goal is to raise awareness of Weezer and the new song. Much like I heard about the video from Silicon Valley Insider, hopefully someone will wander across my blog and keep sharing.

Check out the new video. It stays true to the bands fun-loving sound and spoofs some of the most popular video clips on the web. Its kind of fun to watch and see which ones you can identify, but for those of us that don’t have the time or attention span, here is a video providing a rundown of the 24 original shorts (hat tip Valleywag).

First, Twitter’s chief architect has left the company. It is still speculation as to whether this was an amicable parting of the ways, but it is clear that Twitter has struggled to keep the service running in the days since his departure. As a lesson in entrepreneurship, sometimes key people have to go. This gives an opportunity for new blood to come on board with fresh perspective, energy and ideas. Maybe this is needed? Let’s face it, the simple service hasn’t really increased the robustness of its service in the 16 months I’ve been using it.

Second, Twitter has hired some mercenary software development staff form Pivotal Labs. Not to get the techno-geeks too excited, but this is like hiring the A-Team of software writing. On the down side, this is a mercenary team. Once the work is done, Hanibal and company collect big paychecks, enjoy a cigar, and move on to the next project. Let’s hope Twitter has someone to learn the new architecture and help it evolve with future needs.

As an interesting study in developmental strategy, I think Twitter has been forced into taking these steps. First, I don’t think they have any substantial intellectual property to protect their service. Second, many big name people in the tech business have hinted at the simplicity of Twitter’s architecture and an interest in creating a rival platform. I’ve heard that those efforts are being kept in stealth mode, but this could create an interesting environment for Twitter. Given the Townhall project by Microsoft (MSFT),I wouldn’t put it past MSFT to develop something in house. Lastly, Twitter experiences competitive pressure from Google acquisition Jaiku.

Image from casualgamedesign.com.

Let me begin by saying that I am not a Knoxville native. My only Knoxville credentials are a graduate degree from UT, almost two years of residency, and actively reading Jack Neely’s Secret History articles. For the record, I’d be interested in Jack’s thoughts on “The Couch” as Knoxville’s unofficial historian. From my perspective, I wasn’t really insulted by the nickname, but maybe I don’t know any better.

That being said, there are two elements of this literary incident that do not surprise me. First, I would not be surprised by a NYT writer taking literary liberties with certain facts. In my opinion, the “gray lady” has moved away from  its 98 Pulitzer-prize-winning history as the current leadership struggles with competition from new media. When a Knoxville Tennessee native, Adolph Ochs, took management of the New York Times int he late 1800’s, he gave the paper a new slogan– “All That’s Fit to Print.” With this new mission, the gray lady took on international prominence and became a literary force. Not only did the NYT generate award-winning articles, it also utilized cutting edge technology to grow circulation and appeal to a broader audience.

Over the past few years, I’ve heard many conversations criticising the editorial and managerial decisions of the NYT. It seems the slogan today is “Anything We Want to Print.” In 2004, then NYT public editor Daniel Orkent wrote a piece that criticised a certain liberal bias in the paper. He remarked on the papers deliberate “cosmopolitan slant” towards certain social issues. To be honest, this makes sense given the location of the paper, but this bias seemed to increase over the past few years and influence other categories. The New York Times has also struggled with plagiarizm and fabrication (ahem, Couch-gate). In 2003, Jason Blair was forced to resign after his writing was found to be at fault in both.

The modern newspaper faces a much different competitive landscape than twenty years ago. Now we live in a world of 24-hour news coverage provided over the television and Internet. This news medium, probably more accurately described as opinion, entertains people with the Bill O’Reillys, Keith Obermanns, and Chris Matthews of the world. More frightening than the commenatary of these talkings heads is the fact that many people seem willing to accept their opinions as factual news. At the end of the day, newspapers and all traditional print media struggle to keep up with this “I need it now” mentality. Subscriptions have been shrinking and circulation costs have been increasing.

This brings me to the second element of this incident that doesn’t surprise me– bloggers. Blogs have cut into traditional media. Bloggers have a chip on their shoulder, similar to any upstart stuggling to get respect. Lets face it, even legitimate bloggers are the Rodney Dangerfields of the world. Brilliant writers struggle to get an income because “they just don’t get no respect.” Fortunately, we’ve seen a change in this dynamic over the past few years as many bloggers have been brought onto newspaper staffs and many newspaper writers have developed blogs. Regardless, local bloggers can be very protective of their territory, and with our cultural pride, Knoxvillians aren’t any different. If the validity of the nickname is a stretch, the writer was very naive in thinking it would be accepted as common knowledge. Now if one of the Knoxville blog community had come up with the new nickname, then it would have been different…

That being said, I’m proud of our little community for its cultural pride and sense of community. Likewise, I’m appreciative of the NYT article and the many positive things it points to in this great city (although, I could do without the “I’ll Take My Ball and Go Somewhere Else” response from the author). I was also pleased to see local newspapers and local bloggers working in tandem to unveil this mystery. Again, maybe Jack Neely will weigh in next week on the legitimacy of “The Couch?”

Of course, every notable incident involves a conspiracy theory. Maybe this whole thign was planned in advance in order to spur linking and discussion (double hat tip to Doug at Reality Me and hat tip to Glenn at Instapundit).

Pitching

Guy Kawasaki has a post about How to Pickup a VC. After going through 10 rather hilarious ways on how not to start a pitch, he gives the one sure fire way to do it… cut the crap and get to the chase. My military buddies call is the KISS principle– Keep It Simple, Stupid. Don’t feel obligated to demonstrate your superior knowledge or the technology’s awesomeness in the pitch. Instead, focus on the problem and your solution. Then, you can demonstrate your knowledge and preparedness  in the follow-up questions (and meetings). Think back to dating. You don’t land a date with “that girl” by using cheap pick-up lines or self-promoting. You landed that date by focusing on her interests. VC’s are the same way. Focus on their interest (see my writings on the investment profile). 

My favorite from Guy’s list… Entrepreneur says: “I’ve always wanted to be an entrepreneur.” Venture Capitalist thinks: “… and I’ve always wanted to be a professional golfer.” In my case, I’ve always wanted to be the lead guitar for a blues/soul/rock band.