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- Pinterest’s Unlikely Journey To Top Of The Startup Mountain
- Real Estate Will Always Be The Best Investment: Time To Augment It
- Cater2.Me Finds A New Way To Feed San Franciscans With Pop-Up BetaKitchen
- Ridiculous ‘Google Glass’ Video Ripe For Parody
- How Can We Disrupt The Cell Carriers?
- The Rise of Full-Box CRM
- Selling Digital Fear
- Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask)
- Why You’re A Startup Founder: Nature And Nurture
- The Future Of Content: Content Is The Future
- Gillmor Gang: Lawyers, Puns, and Monkeys
| Pinterest’s Unlikely Journey To Top Of The Startup Mountain Posted: 08 Apr 2012 09:00 AM PDT  Editor’s note: Derek Andersen is founder of Commonred and Startup Grind. Follow him on Twitter @derekjandersen. Over the past 12 months, I've had the pleasure of interviewing some of the Valley's best entrepreneurs and investors at Startup Grind. People like Naval Ravikant, Kevin Rose, Tony Conrad, MG Siegler, Jeff Clavier, and others have inspired us with stories and trials they have overcome to get where they are. In February we hosted Pinterest co-founder (and now officially CEO) Ben Silbermann in Palo Alto. He is one of the most humble entrepreneurs I have met in my seven years in Silicon Valley. The story of Pinterest’s founding is more valuable to me than most startups because it is a reflection of what a lot of founders who regularly read TechCrunch go through in the everyday startup grind. Pinterest’s founders are smart guys, but they're not prodigies. The product is huge now, but no one liked it when it launched. They weren't well funded and for a very long time. These are things that normal, non-rock star entrepreneurs like me (and maybe you) can relate to. Founder Background Raised by doctors in Des Moines Iowa, Ben assumed he would follow the same path as his parents. He attended Yale University starting in 1999 and soon realized that he didn't want to be doctor. After a consulting gig in Washington DC, he headed to Silicon Valley in 2006 to join Google working in customer support and sales. "I felt the story of my time was happening in California,” he said. “I didn't have a specific plan I just wanted to be closer to something that felt really exciting. Google was the first company I worked for that was thinking really big." As a non-engineer at Google, Ben felt there was only so far that he could go in that culture. He kept talking about doing a startup but it was his girlfriend (now wife) who pushed him saying, "You should either do it or stop talking about it." After leaving Google he spent time working at places like the Hacker Dojo, and every coffee shop in the valley. Sound familiar to anyone? To Pivot Or Not To Pivot Four months after launching, Pinterest only had 200 users. Ben has said their product was "in stealth mode but not because we wanted it to be." The first major pockets of users were in Iowa and Utah and the company wasn't on any radars in the Valley. It didn't pop in California for the first year and a half. Ben believes the typical market fit philosophy for technology of having to get early adaptors on board is no longer required. There was no press coverage on the site, but the early users really liked it, and more importantly they used it a lot. "The site grew by the same percentage (40%-50%) every single month. It's just that the number started so low that it took a while to get going." The team attempted to raise money, but the non-engineer driven founders had little success. Despite dozens of meetings with "everyone" in Silicon Valley. Most passed on the deal. They worked with a lot of engineers most of which weren't near the Facebook and Google level of talent they're getting access to today. Remarkably the Pinterest team maintained their original vision despite the Valley's pressure to be successful quickly or pivot (aka: admit failure). Pinterest's early traction wasn't positive. But the Silicon Valley culture and community of being helpful and not giving up kicked in to push the team to keep pressing forward. While feeling the pressures of possible embarrassment if he had to go to Google to ask for his old job back, Ben never seriously considered giving up. Focus On Product Much of what you see on the site today was in the product at the very beginning. They were one of the first sites to do the grid-like layout and they over invested in design. They spent months working on it. "We were obsessive about the product. We were obsessive about all the writing and how it was described. We were obsessive about the community. I personally wrote to the first 5,000-7,000 people that joined the site." Pinterest was about getting you offline to do all of these things you're talking about online. Pinterest was also integrated with Facebook from the very beginning. All the founders were aligned on building something that they were really proud of. "I think we knew from the beginning that we were building a very different kind of product."
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| Real Estate Will Always Be The Best Investment: Time To Augment It Posted: 08 Apr 2012 06:00 AM PDT  Editor’s note: Jacob Mullins is a senior associate at Shasta Ventures. Follow him on Twitter @jacob. I spend a good portion of my day thinking, researching, and analyzing our industry, our world, consumer habits, and the technology products that enhance and cause fundamental change within it. My job is quite literally to see where the puck is going and get there first. My goal is to gain insight into the direction before the shot is hit, before the trajectory is set, and if possible, before the puck is even dropped into play. Over the past months I've been mentally mulling over the profundity of Real Estate. Throughout history, real estate has been the most coveted, fought-over, and valuable resource to humanity. Entire civilizations were created, and wiped out, on their level of success in securing it and the access it provided for their people. In the modern age, this has meant the creation of vast amounts of wealth for those who control and monetize it according to their needs, for both countries and individuals alike. In our lifetime we've had the spectacular fortune of playing a part in the creation of an entirely new dimension of real estate – the World Wide Web. Like it's analog counterpart, those who are able to amass surface area and provide enough value to users are rewarded with tremendous wealth. As I look ahead with the eyes of an investor, I ask myself what is the next dimension of real estate and how can it be most opportunistically exploited? The rapid advancement of mobile technologies over the past ten years has created a paradigm shift in user behavior, and thus consumer technology products. "Mobile First" is the strategy of the day, and the inclusion of location-aware data layers is the new fabric of real estate – one that blends physical and digital – resulting in a final product that is much greater than the sum of its parts. We're at the very beginning, the opportunity is fast upon us to create and own this new Augmented Real Estate, where digital landmarks exist in our physical world. There are a number of companies approaching the landscape with different perspectives, here are a few: Augmented Reality Engagement Companies like Goldrun and Ogmento create branded augmented reality experiences in our physical world. They're focusing on enabling brands and media companies to reach their potential customers in a rich, more engaging way. They turn the mobile device into the viewing portal to see unique experiences. Leveraging location data, Goldrun is most famous for it's 24-hour augmented reality pop-up stores for Airwalk that appeared in Washington Square Park and Venice Beach. Here, users could purchase limited edition shoes only available in these "invisible" AR stores. Ogmento is focused on enriching experiences with media content and most famously released an AR app that coincided with the launch of the Paranormal Activity film in 2010. This location-based mobile game turns the real world into the set for supernatural conflicts, where the user battles "demonic forces" interacting in the areas surrounding the user. While these campaigns are lighthouse examples of the creation of new Augmented Real Estate, it's clear that they are high-touch engagements with the brands. While they're clearly leveraging strong technology, they may want to consider how to more productize their offering to enable AR across a mass of mobile application developers in a more self-serve model. Digital Breadcrumbs Pinwheel and Red Robot Labs are enabling users to interact with physical locations by creating digital tokens and memories, shareable with others. Pinwheel uses location-data as an anchor point for users to recount memories and share photos. For example, I posted a memory and recommendation at Nook, a small café in the Russian Hill neighborhood of San Francisco. As friends go near the location, they will see that I left a "digital breadcrumb" and can read my post and partake in my memory. Red Robot Labs is activating real world locations and turning them into a game. With their first title "Life is Crime," users are able to "commit virtual crimes in the real world," and in a Foursquare-esque check-in process able to virtually battle over physical locations. Here, I can't help but recall Gowalla 1.0 (ahead of it's time) which upon check-in would enable users to obtain, carry and share virtual tokens from one place to another. (Shasta is an investor in Red Robot and Gowalla). While there are no lack of services enabling tagging of content with lat-long data, it will be the services that enable users to intelligently discover these breadcrumbs at the right time which will come out ahead. The Viewing Lens For every piece of content added to the augmented landscape, it's really only relevant if users are able to discover it at the right time. Currently, most software companies are leveraging smartphones as the lens into this world. While, more ambitious contenders are developing hardware solutions to bring the worlds together. Google’s recently announced Project Glass is a set of Internet-connected eyeglasses that intelligently layers data on the glass in front of your eyeball enabling you to walk through the world seeing relevant digital data displaying around you. Innovega, a Seattle-based startup, is taking a similar approach though by developing a contact lens able to display this information directly on the eye – providing access to a simulated 240 inch screen in front of the user. Hardware is a difficult and expensive game to play, but Google is one of the best-resourced players to attack it. I wouldn't be surprised if there were a number of purely technical research companies that come into Google's acquisition view as they look to bring Project Glass to market. The market is young and the opportunity is here to start staking claims in the augmented real estate boom. These companies are the pioneers, but there's an entire frontier to explore with incredible fortunes to be won. [image via flickr/Justin Otto]
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| Cater2.Me Finds A New Way To Feed San Franciscans With Pop-Up BetaKitchen Posted: 08 Apr 2012 03:00 AM PDT  Until now, Cater2.me has focused on using the Web to connect companies (which need to feed their employees) with small restaurants and food carts. Now it’s opening a restaurant of its own — or rather, what it calls the BetaKitchen. The idea, says co-founder Zach Yungst, is to create something that’s to be visible to consumers, not just office managers trying to plan the next big meal. As with Cater2.me’s existing service, the goal is to connect people with a wider variety of food than they might experience otherwise. At the BeatKitchen, you’ll have the opportunity to sample food from a changing lineup of San Francisco chefs. Eventually, the “pop-up and test kitchen” should also drive people back to the Cater2.me site, where they might see upcoming chefs, rate the food, and eventually vote on the who will be cooking. And since the BetaKitchen is located in the South of Market neighborhood, which is dense with startups, it may end up serving employees from some of the companies that it already caters to. (SoMa is also where Flip Jonathan Kaplan chose to launch his mix of food and tech, The Melt.) So if you’re in San Francisco and mulling over your lunch options this week: The BetaKitchen will be located at John Colins bar at 138 Minna, starting on Friday. Food on the first day will come from Mission-based Soul Groove, which will serve chicken and waffle sandwiches.
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| Ridiculous ‘Google Glass’ Video Ripe For Parody Posted: 08 Apr 2012 01:20 AM PDT  Be afraid, be very afraid. Google announced its ambitious Google Glass project this week, and made the below demo video depicting a world where human computer interfaces only allow you to interact with the most pleasant of hipster stimuli, overlaying a patina of cliche urban millennial all over your daily life. Suddenly all your friends are wearing those dumb black nerd glasses. You, as the NYC-dwelling (of course) uberhipster in the first clip, spend your day at the Strand Bookstore, chasing around a food cart, photographing street art and learning how to play something called Monsieur Gayno on the ukulele. It’s like you woke up inside an episode of “The New Girl.” Or this Mashable article exploded. But the video’s ridiculousness goes beyond its blatant target marketing, in that it avoids one terribly obvious problem: Computers sometimes really suck.
Nick Bilton writes. Really? Google can’t even fix the Gmail search experience on iOS, imagine if you had to see every one of your emails scroll ACROSS YOUR FREAKIN’ FACE ALL AT ONCE? Or how about a spinning beach ball of death or a crash message or any kind of spam? I would rip my face off.
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| How Can We Disrupt The Cell Carriers? Posted: 07 Apr 2012 06:00 PM PDT  Editor’s note: Hemant Taneja is managing director at General Catalyst. Follow him on Twitter @htaneja. Every time I pick up my iPhone lately, I've been asking myself: Why do we call this a "phone"? If my "phone" habits are any indicator, we shouldn't be calling this a phone at all. On the iPhone, I don't like taking phone calls. I've moved the green phone application button away from the bottom tray and replaced it with other apps I use frequently. If Apple allowed us to actually delete the phone app, I'd bet some of us would do it right away. In our evolving relationship with mobile phones, I wonder when we are going to stop calling it a "phone." It's semantics, but the words are important and affect our mindset. If we're using precise language, these devices are really computers with data-collecting sensors and processors that happen to have voice capabilities as a feature. Part of the mindset problem is unfortunately highlighted by the carriers business models and pricing plans. Carriers charge 80% of monthly fees for voice and the rest for data when, in fact, for many of us our usage patterns are actually the inverse. As a result, carriers segment our data usage and stifle innovation and worse, consumer adoption, at the application layer. If you're not lucky enough to be "grandfathered" into an unlimited data plan, you have to monitor your data pull for fear of paying exorbitant overage fees. This is the result of a structural issue in the wireless carrier industry. The carriers are running a series of systems today — a voice network, a voicemail system, a SMS platform, and a data network — when the reality is that all they truly need is a data network with "phone" as well as asynchronous messaging applications that already exist. The carriers' legacy architecture is artificially placing a large cost on consumers and, worse, stifling adoption at the application layer. There is too much pressure on these antiquated pricing models. For instance, will applications who monetize our usage end up paying a carrier like an 800-number would? Or, could applications subsidize our data costs in different ways? For instance, if I'm on Twitter for 80% of my mobile usage, which goes against my data plan, would Twitter offer some payment back to the carrier? Or, could an application pay me directly for using it after a certain threshold, which I could use to offset my monthly costs? There are more questions than answers here, but it will be interesting to see which carrier has the foresight to work with handset makers and application developers to make this more sustainable for end-users. There's much that needs fixing here. The handset makers are doing their part. The app developers are doing great work. We are all paying through the nose for these great experiences and utilities. But, the party won't last. The carriers have to carry their weight. The first thing we have to do is stop thinking about a device like the iPhone as a "phone." It's really a computer that just happens to make calls over cell towers. And, when we start using the right language, we will start to change our mindset, our demands, and hopefully, the carriers will take notice. In fact, they may have no choice but to do so. In my view, the root problem is that there is no competition in the wireless carrier industry. They have no incentive to properly keep up with innovation in the hardware platforms and the application ecosystem. It would be nice to see entrepreneurs focus on disrupting this industry. Conceivably, a company (or set of companies) could emerge to redefine the device away from being a "phone" to something new. My gut tells me that if someone could offer a $50/month plan with the core set of applications including messaging (voice, data, and video) off of a data-centric network, it could present a great value proposition for consumers. Consumers don't want to think about blowing through their data plans every time they download a video or upload a photo. I don't think building such a company has to be very capital-intensive proposition, given all the online mechanisms that available to acquire customers and vast ecosystem of applications that already exist. What do you all think? How can we force the carriers to change or build something new? [image via flickr/acidpix]
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| Posted: 07 Apr 2012 05:00 PM PDT  Editor's note: Jon Bischke is a founder of Entelo and is an advisor to several startups. You can follow Jon on Twitter @JonBischke. CRM is a massive business. At least an $8 billion industry according to Gartner. Salesforce, the company you think of when you hear CRM (after all, it is their ticker symbol) has a market cap north of $21 billion dollars. And while sales departments are typically most commonly thought of in conjunction with these systems, they’re far from the only adopters of CRM. In the human resources and recruiting space the equivalent to CRM is the applicant tracking system or ATS. This is also a big business, worth somewhere in the neighborhood of a billion dollars. Taleo, a leader in the ATS market, was recently acquired by Oracle for $1.9 billion. SuccessFactors, another provider of ATS software, was bought by SAP for $3.4 billion. And it’s not just big companies that are worth watching in the space. Streak, a stripped-down CRM that sits within GMail, is experiencing tremendous growth. Nimble, an LA-based company, is posting solid numbers as well with the company’s CEO Jon Ferrera sharing that active users of the product are spending about four hours a day on the platform. Jon knows a thing of two about CRM. After all, he was a founder of Goldmine, one of the largest players in the CRM space (back when the industry was commonly referred to as contact management software). Indeed, it’s an interesting time to be in CRM. But there’s a noteworthy trend that could change CRM as we know it. It has the potential to be as revolutionary as the movement to cloud-based SaaS platforms at the turn of the century. That trend is the rise of the “full-box CRM” and this trend seems noticeably different from the buzz around “social CRM” which focuses more on social media monitoring (think Radian6). So what is full-box CRM? Let’s start with what empty-box CRM is. When you buy a CRM platform and roll it out inside of your organization what you initially start out with is an empty box. Your sales, marketing and human resources organizations are then tasked with filling the box with leads. Significant energy is spent on prospecting, data entry and management of existing contacts. Filling the box is, in itself, a multi-billion dollar industry with leaders like Eloqua, Hubspot and Marketo among the fastest-growing SaaS companies in history. Enter the full-box CRM. A full-box CRM comes pre-filled with “customers” (e.g., sales leads) and this is a big deal. Now the workflow of your team is spent on searching your existing system for the right people rather than going “outside the box” to find those people. And because all of the data is contained internally the massive amount of wasted productivity on data entry goes away. But where does this data come from? And this is where the enabling factor for the full-box CRM comes in: the rise of the social web. The types of people that would end up in a company’s CRM are more visible than they’ve ever been. They’re on LinkedIn, Twitter, Facebook and a whole host of other sites. People are already using tools as well-known as Data.com and Klout and as obscure as Follower Wonk to mimic full-box CRM systems today (Disclosure: Our company Entelo is doing work in the full-box CRM space.) The rise of full-box CRMs brings up a host of potential issues and challenges. Privacy concerns will be paramount and there is sure to be some backlash as has already been seen in older controversies surrounding Jigsaw/Data.com (see Michael Arrington’s 2009 TechCrunch post The World Has Changed. Is Jigsaw Still Evil?) and more recent controversies involving Klout (see Charlie Stross’s Evil social networks post and Klout CEO Joe Fernandez’s response). Despite concerns, there are tremendous productivity gains to be made here. At a minimum, billions of hours are spent each year on rudimentary data entry and on scrubbing and maintaining that data. Furthermore, increased visibility into more efficient communication channels made possible by social networks like LinkedIn and Facebook provide a historic opportunity to do business in new ways. Indeed, LinkedIn seems exceedingly well-positioned to pounce on the full-box CRM opportunity and their recent acquisitions of Connected and Rapportive seems to indicate that they’re positioning to go after this full-force. Changing tides make for unpredictable sailing of course and ago a decade it wasn’t clear who would dominate the CRM landscape as it shifted to the cloud. Similarly, it’s entirely too early to declare a winner here but given an industry of this size, the stakes are significant. [image via flickr/Roger H. Goun]
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| Posted: 07 Apr 2012 04:16 PM PDT  The crowded building's not on fire. After an exhaustive investigation of the top 100 Facebook apps, the Wall Street Journal didn't find any serious privacy violations. While sensationalizing the dangers of online privacy sure drives page views and ad revenue, it also impedes innovation and harms the business of honest software developers. Reality has yet to stop media outlets from yelling about privacy, and because the WSJ writers were on assignment, they wrote the "Selling You On Facebook" hit piece despite thin findings. These kind of articles can make mainstream users so worried about the worst-case scenario of what could happen to their data, they don't see the value they get in exchange for it. “Selling You On Facebook” does bring up the important topic of how apps can utilize personal data granted to them by their users, but it overstates the risks. Yes, the business models of Facebook and the apps on its platform depend on your personal information, but so do the services they provide. That means each user needs to decide what information to grant to who, and Facebook has spent years making the terms of this value exchange as clear as possible. The sub-headline for the WSJ’s article is “Many popular Facebook apps are obtaining sensitive information about users—and users’ friends—so don’t be surprised if details about your religious, political and even sexual preferences start popping up in unexpected places” but it’s not until the 10th paragraph that it mentions that apps “obtain” this information through a detailed data permissions process. Also, Facebook apps have been able to ask for this data since 2007. Wouldn’t it already be “popping up in unexpected places” by now if that were actually true? When you go to install an app, you’re first shown a description of what the app does, what data it needs such as your email address or your friends’ photos, and you’re able to select who can see your in-app activity. If the app requires more than biographical information and the option to publish to your wall, it has to show a second screen listing every type of data or ability it needs. It’s probably the most privacy-sensitive process for granting access to personal data on the Internet. You can’t have apps that show you local concerts or let you send birthday cards to friends if the app doesn’t know your location or when your friends’ birthdays are. The WSJ and other media often harp that apps ask for more user data then they need. That’s actually against Facebook’s policy, and it hurts developers anyways as each additional permission they ask for reduces install rates by 3%. Users are not breezing past long lists of permission requests. They notice, and in fact are clearly turned off by apps who appear greedy for data. Indeed, friends can provide your data to apps without you being notified. But you can limit or shut that off if you want, and most people wouldn’t want a constant barrage of notifications about a friend who can already see your data accessing it through an app. After its commendably deep analysis, all the WSJ could come up with was that a few small startups use unapproved ad networks to monetize their apps, and don't properly spell out their privacy policy in writing. Facebook set the bar high by voluntarily establishing the approved ad network program and privacy policy requirements to provide users with additional protections. This makes enforcement a challenge, but Facebook roots out offending apps through a three-tiered system of automated detection, a human team, and the ability for users to flag violations. It's not that Facebook "occasionally isn't enforcing its own rules" as the WSJ says, it's that with 7 million constantly changing apps on its platform, it’s not always immediately aware of more benign infractions like those the WSJ found. There are real data privacy concerns out there, but most stem from users making too much data about them publicly available. I think it’s irresponsible for Facebook to default new user privacy to public for everything from photos and status updates to current city and work history. Controversial mobile apps like “Girls Around Me” can use this public data to enable some shady activity, but that’s different than the apps we’re discussing where we and our friends provide our private data. The fact is that businesses have been requesting personal information from their customers for hundreds of years. How do you think the Wall Street Journal knows where to deliver your newspaper? It asks for your home address. Facebook actually prohibits apps from selling this type of data to other companies — something print publishers have long been known to do. That’s why your home mailbox is full of junk. By drumming up privacy concerns, mainstream media is holding back the future and the companies trying to bring it to us. Yes, change can be scary, but it can also be beneficial. We’re seeing cumbersome necessities of offline business like filling out contact information cards by hand get streamlined into a few clicks as they move online. But forget that. This adjoined WSJ article walks you through deleting all your Facebook apps and turning off the platform entirely so you never have to bothered with useful services again. Here’s a concrete example of what we’re missing out on because of this fear. Last year, Facebook wanted to allow applications to ask for your mobile phone number and home address. With permissions apps could have notified you by text message when friends were nearby, or let you instantly fill out shipping information for e-commerce purchases. But instead, the media went crazy, sure it would lead to waves of SMS spam and home invasions. Politicians started bleating against the options to, and Facebook had to retreat. Now we still can't choose whether to grant Facebook apps information that on and offline marketers ask us for all the time. So instead of human connection and faster shopping that could help the economy, fear trumped innovation and we got no improvements. It’s time we start thinking critically about what makes us uncomfortable. If there are serious dangers that aren’t being policed, let’s shut them down. But if something scares us just because it’s new, let’s weigh the risks against the benefits, and put down the pitchforks and torches. [Image Credit: Luke Romyn]
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| Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask) Posted: 07 Apr 2012 01:42 PM PDT  Editor’s note: Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, a boutique corporate law firm specializing in the representation of entrepreneurs. Check out his blog or follow him on Twitter as @ScottEdWalker. We are in the golden age of seed financing. Venture capital funds, seed funds, super angels, angel groups, incubators, and "friends and family" are all playing the seed financing game and investing early in startups in an attempt to land the next Facebook. As a result, the pendulum has swung dramatically in the founders' favor, and the issuance of convertible notes for seed financing has never been more prolific. Indeed, as a corporate lawyer for 18+ years, I have seen this development first-hand. This post is the first part of a three-part primer on convertible note seed financings. Part 1 will address basic questions, such as (i) what is a convertible note? (ii) why are convertible notes issued instead of shares of common or preferred stock? and (iii) what are the advantages of issuing convertible notes? Part 2 will discuss the two most significant issues for founders in connection with the issuance of convertible notes: (i) the valuation cap and (ii) the discount (and how they interrelate). Part 3 will cover certain special issues, such as (i) what happens if the startup is acquired prior to the note's conversion to equity? (ii) what happens if the maturity date is reached prior to the note's conversion to equity? and (iii) what securities laws do founders need to worry about in connection with the issuance of convertible notes? What is a Convertible Note? A convertible note is short-term debt that converts into equity. In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing. In other words, investors loan money to a startup as its first round of funding; and then rather than get their money back with interest, the investors receive shares of preferred stock as part of the startup's initial preferred stock financing, based on the terms of the note. Why Can't a Startup Issue Shares of Common Stock to Investors? It can. In fact, many incubators like Y Combinator and TechStars are issued shares of common stock for their initial investment (usually about $20,000). Friends and family are also often issued shares of common stock. Most sophisticated investors, however, will not accept shares of common stock for their investment and will push hard for shares of preferred stock, with special rights (as discussed below). In addition, the issuance of shares of common stock creates three potential problems. First, the founders risk substantial dilution because it is often difficult for the founders and the investors to agree on a valuation for the startup and, accordingly, to agree on the percentage ownership the investor will receive. For example, if a startup is merely two guys and an idea, how much equity should an investor receive for a $100,000 investment? 10%? 25%? 50%? Second, there may be tricky tax issues depending upon the timing of the investment. For example, if two co-founders are issued shares of common stock for a nominal purchase price upon incorporation, and investors pay substantially more for their shares of common stock at the same time or shortly thereafter, the IRS may impute a much higher value on the shares issued to the founders and deem the excess amount over the purchase price a form of compensation — and therefore taxable to the founders as ordinary income. Third, the issuance of shares of common stock may cause potential problems with respect to stock option grants because the underlying value of the shares of common stock (i.e., the "strike" or "exercise" price) will have been established. The goal, of course, regarding option grants is to price the options as low as possible so that the option recipients are incentivized and are able to adequately share in the increased value of the company that they help create. A high strike price undermines that goal. How Does the Issuance of Convertible Notes Address These Problems? One of the key advantages of issuing convertible notes is that the valuation issue is kicked down the road until the Series A round of financing – when there are a lot more data points and thus it's much easier to value the startup (i.e., price the round). Accordingly, the issuance of convertible notes disposes of the foregoing three problems. Again, a convertible note is a loan (debt, not equity). A valuation of the startup is thus unnecessary; and, if there is no valuation, there are no problems of dilution, taxes and option pricing. What are Some of the Other Advantages of Issuing Convertible Notes? Speed, simplicity and cost. Indeed, a startup could close a convertible note round in a day or two by merely issuing a 2-3 page promissory note, which could cost as little as $1,500-$2,000 in legal fees (or a little more if a note purchase agreement is also executed, which is customary). On the other hand, the issuance of shares of preferred stock is complex, and it can take weeks to negotiate all the terms and documents — with legal fees in the neighborhood of $10,000 – $30,000 or more (depending upon whether the investors insist on full-blown Series A-type documentation, as opposed to stripped-down documentation like the "Series Seed," discussed below). Another significant advantage of issuing convertible notes is to avoid giving the investors any control. When investors receive shares of preferred stock, they are typically granted certain significant control rights, including a board seat and veto rights with respect to certain corporate actions (such as the sale of the company) pursuant to so-called "protective provisions." They also have certain key rights as minority stockholders under applicable State law (usually Delaware). Convertible noteholders are rarely granted control rights (and have no minority stockholder rights). For example, in Fenwick & West's 2011 Seed Financing Survey (the "Fenwick Survey"), convertible noteholders were granted a Board seat in only 4% of the seed financings; while preferred stockholders were granted a Board seat in 70% of such financings. Finally, another advantage of issuing convertible notes (and probably the least understood and most important) is the extraordinary flexibility they offer in connection with "herding" prospective investors and raising the round. As Naval Ravikant, a co-founder of AngelList, aptly noted in a recent interview on This Week in Startups with Jason Calacanis (at the 17:55 mark): "Convertible notes have made variable pricing possible." Paul Graham reached the same conclusion in his post, "High Resolution Fundraising":
Naval and Paul are referring to the conversion valuation cap (or the "cap"), which I will discuss in detail in part 2 of this series; for now, suffice it to say that the cap is designed to protect the investors by putting a ceiling on the conversion price of the note and thereby permitting investors to share in any significant increase in the value of the startup subsequent to their investment. If, for example, the cap were $5 million and the pre-money valuation in the Series A round were $10 million, the amount of the note (plus accrued interest) would convert into shares of preferred stock at an effective price of $5 million or one-half of the price paid by the Series A investors. Accordingly, the cap is akin to a valuation in a priced round (i.e., if the startup were issuing shares of common or preferred stock). But the beauty of the cap is that it is not a valuation for tax purposes, which is why different investors may get different caps, unlike in a priced round (unless there were subsequent closing sufficiently far enough apart to justify different valuations). As Paul says in his post above:
Why Do Sophisticated Investors Push for Shares of Preferred Stock Instead of Convertible Notes? We've already covered one of the principal reasons: preferred stockholders are typically granted control rights, including a board seat and certain veto rights. They are also typically granted certain additional economic rights (like Series A investors), such as pro-rata rights and a liquidation preference. In fact, in the Fenwick Survey, 9% of the preferred stock seed financings included a participating preferred liquidation preference (which is not founder friendly). Other reasons have been articulated by a number of high-profile investors (including Fred Wilson, Mark Suster, Manu Kumar and Seth Levine), the most significant of which can be summarized as follows: 1) There are now stripped-down, preferred stock financing documents (like "Series Seed" and other standardized forms) that make a priced round just as fast and cheap as issuing convertible notes. 2) The interests of the founders and the investors are "misaligned" if the investors are issued convertible notes that are not capped. This is because it's in the founders' interest to maximize the company's valuation in the Series A round, and it's in the noteholders' interest to minimize it. Investors are thus "penalized" for helping a startup get a higher valuation as a result of their introductions, domain expertise, etc. 3) Obtaining a fair valuation may be tricky for unsophisticated investors, but not for sophisticated ones. As Fred Wilson argues: "I can negotiate a fair price with an entrepreneur in five minutes…" 4) Noteholders must wait for the date of conversion to start the clock running for long term capital gains treatment; with shares of preferred stock, the clock starts running immediately. Are the Series Seed and Other Standardized Forms Really as Fast and Cheap as Convertible Notes? The Series Seed and other standardized forms have solved a huge problem: how to get shares of preferred stock into the hands of investors in a seed investment without having to draft and negotiate a full-blown set of Series A documents, with all the bells and whistles (and associated legal fees of $50,000+). However, to say that using these forms makes a preferred stock financing as fast and cheap as a convertible note financing is a bit misleading because we are talking about non-negotiable, fill-in-the-blank forms. Obviously, any transaction will be fast and cheap if the parties utilize fill-in-the-blank forms, without any back-and-forth negotiation. Indeed, as I have previously discussed, the fundamental problem with these standardized forms is this one-size-fits-all approach. Every financing is different, and the structure and terms are based on a number of different factors, including (i) the size of the investment; (ii) whether the startup is "hot" (and there's a competitive environment); (iii) who the investors are; (iv) current market conditions, etc. Simply put, it may not be in the founders' interest to utilize these forms and issue shares of preferred stock for a relatively small investment or if the founders have strong negotiating leverage (as recently demonstrated by $2.35 million convertible note seed financing by HealthTap) — particularly because these forms require the founders to grant certain control rights (and additional economic rights) to the investors, as discussed above. Nor does the issuance of preferred stock allow for the extraordinary flexibility that the issuance of convertible notes permits (also discussed above). As Naval Ravikant profoundly pointed out in his recent interview with Jason Calacanis (at the 19:19 mark):
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| Why You’re A Startup Founder: Nature And Nurture Posted: 07 Apr 2012 12:06 PM PDT  Editor’s note: Pokin Yeung founded two startups, GeckoGo and Askomatics, and is currently blogging and helping out various other startups. Follow her on Twitter @pokin. Just over a month ago, a random conversation with another startup founder over lunch turned into a full-blown research project. "You and I are both first-born children," I mused to my friend, "I wonder if that had any influence on why we chose to start businesses." I theorized that first borns were often given more responsibility growing up, and wondered if this role served as training wheels for building startups. I also wondered if our upbringing had an influence on things like when we start, what we start, or how much money we raise — and ultimately, how successful we are with our businesses. Four weeks, a survey of 318 founders, and a lot of data-crunching later, here are my conclusions: Family Matters
Startups run in the family The data suggest that your parents can shape your inclination to become a founder – especially if your mom was an entrepreneur and you're a girl. Female entrepreneurs are 1.4 times more likely to have a mom who was also a founder. Over 50 percent of our founders surveyed have a parent who had also started a business, and 14% of respondents have a brother or sister who's taken the leap. So it seems having a good role model matters — especially for females. Organizations like Women 2.0 are a good start, and more access to mentorship programs during the formative years could make a big difference in bringing more female founders into play. Higher education or trial by fire? Startup founders have to do a lot of multi-tasking, but two things that don't seem to mix are school and startups. Most founders tend to wait till school is done before starting their first business. In general, by the time founders are 25
Also, 50 percent of you waited till after 30 to start your first business if you had a graduate degree. How else do you compare against the population? For starters, you overachieve. Startup founders in general tend to overachieve. You are 6.4 times more likely to have skipped a grade, and 6 times more likely to start some sort of business endeavor (selling candies, anyone?) while still in school. Across the board, startup founders are more likely to more likely to do things like play sports, play a musical instrument, or hold a part-time job while still in high school. Maybe it's a desire for learning, general well-roundedness and drive for growth that creates the motivations for founders to strike out on their own? Or maybe it's a curiosity about the world. Lots of potential theories and areas of further research. So what next? The specific circumstances that push founders to take the leap definitely involves more than the sequence in which founders arrive to their families, but it does seem clear that once you become a founder, you stand to quite strongly influence future generations to come. There were other interesting areas of research, including the types of adversity faced by startup founders growing up, and it's what I want to dig into next. If anyone is interested who didn't participate in my study before, I'd love to ask you some questions here. [top image via flickr/sdminor81]
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| The Future Of Content: Content Is The Future Posted: 07 Apr 2012 11:00 AM PDT  Editor's note: Contributor Ashkan Karbasfrooshan is the founder and CEO of WatchMojo, he hosts a show on business and has published books on success. Follow him @ashkan. "I thought the analysis of content vs other video companies very convincing. But I’m curious: the content game hasn’t worked out so well for AOL and Yahoo. Audiences are fickle. Are you predicting a rosier future?" – reader comment in Is Tech a Zero-Sum Game?. Infrastructure, Platforms & Content Today, the Web's infrastructure is built, and we're filling the pipes with content — mainly free, ad-supported content. It might seem like the real opportunities are in user-generated content and aggregation, but anyone who's worked in those fields recognize their limitations: Simply put, marketers want to advertise alongside professional content. Tim Armstrong left Google (the mother of all aggregators) and joined AOL to remake it into the Time of the 21st century. He didn’t double down on Bebo. Content is marketing; Marketing as content Content – video in particular – may be promotional or commercial, in either case it’s a means to an end. Traditional Media Companies (TMCs) need to make their content commercial; new media producers are leveraging their content as promotional, sometimes giving it away to build value. However, when it comes to making money directly from commercial content, the genie is out of the bottle, according to Seth Godin: "Who said you have a right to cash money from writing? Poets don't get paid (often), but there's no poetry shortage. The future is going to be filled with amateurs, and the truly talented and persistent will make a great living. But the days of journeyman writers who make a good living by the word — over." TL;DR Content isn't only increasingly free, it's also short. Godin clarifies: "Shorter, though, doesn’t mean less responsibility, less insight or less power. It means less fluff and less hiding." With 60 hours of content uploaded every 60 seconds on YouTube, producers face three challenges: - 25% of views come in the first 4 days; It's no longer enough to be a good storyteller; you have to cut through the clutter and make the numbers work. The Economics of Content "Network television costs $50,000 – 100,000 per minute to produce. Reality shows can be cheaper, with the lowest-end costing $6,000 – 8,000 per minute", according to GRP venture capitalist (and occasional TechCrunch contributor) Mark Suster. New media producers leverage deflationary economics to produce shows for $500 – $1,000 per minute, on average. My company does it for $100/minute. Once you cut costs down, the real challenge is revenue. Fred Wilson's piece on The Future of Media suggested that the right approach is to: 1 – Microchunk it - Reduce the content to its simplest form. For example, 5Min borrowed a page from Google's AdSense playbook, making it easy for publishers to syndicate the company’s video content, on its way to a $65 million exit to AOL. "But content doesn't scale!" That’s the common critique of content companies from the tech industries. The truth is, bad content scales, good content doesn't scale – the scale comes from distribution and monetization. Demand Media’s "content farm" model scaled but it has since moved upstream to win over Madison Avenue, realizing that unless your clients are on Wall Street or Sand Hill Road, quality trumps quantity. Profit is a Short-Term Move; Value is a Long-Term Focus Content was an art. Today it's a science as well. It will always be about Influence and Authority. Bloomberg will lose $20 million on BusinessWeek, Washington Post sold Newsweek for $1 (plus the assumption of debt). That doesn't imply that there's no money in content, it's a reminder that disruptive innovation can come from new content creators who can be more disruptive to TMCs than any technology ever will. TechCrunch, for example, generated less revenue than BusinessWeek and Newsweek combined but sold for more. Revenues come and go, after all. However, managers typically don't care that much about long-term value creation because their compensation is tied to short-term profits. Goodwill is the Driver of ROI The best storytellers realize content is about Authority, Influence and building a brand. VCs who made their fortune on software and semiconductors can't wrap their minds around content ("it's a hits business"). But despite the 1% annualized return that VCs have generated, they will continue to invest in the latest mouse trap and shun content, despite what the experts say. The Worst-Kept Secret in the Publishing Business The Web doesn't just shrink markets, it also kills sacred cows, in particular Warren Buffett’s argument that "the most important news in the newspaper are the ads". Indeed, Google outsold U.S. newspapers $37.9 billion to $34 billion in 2011. I know, those are global Google revenues — give it a couple of years. So yes, content may be king, but it's the throne that retains the value, even if the throne was seized under dubious circumstances, according to an anonymous publisher: "Many of the big wins in digital content have gotten big by stealing other people's content, and, once they get big enough, they build an original content layer (…) You can make money with quality content on digital. The challenge is it requires expertise in more than just content development." Of course, once you build your audience, you realize you don't need to create content; licensing it is a more profitable short-term bet, but it creates less long-term value. Similarly, ad networks have successfully intermediated between advertisers and publishers, but commoditized themselves in the process. Why Content Has Stumbled The TMCs actually get it: online remains small, and the faster they embrace it, they faster they die. The issue is how management has a short-term outlook to maximize profits, instead of being focused on long-term value creation. The irony is that over time, technology plays come and go: One winner emerges from within a given category and largely kills off its competitors. The real threat to content creators may in fact be emerging content companies with no traditional business to defend. After all, journalism is stronger than ever while newspapers are dying. But TMCs that have their own content catalogs, producers and brands may not see much value in emerging companies, which remain small until they become category killers, just adding to the tragic fate reserved for most. While we live in a world of “good enough”, ultimately the company that can i) create the best content at ii) the lowest cost possible will create most value over time. Disclaimers: - AOL is the owner of TechCrunch
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| Gillmor Gang: Lawyers, Puns, and Monkeys Posted: 07 Apr 2012 10:00 AM PDT  The Gillmor Gang — Danny Sullivan, Robert Scoble, John Taschek, Kevin Marks, and Steve Gillmor — proved unequal to the task of rendering the week’s non-news into insight. Whether it was @scobleizer and Sergey Brin circling the famous Google Glasses or @dannysullivan grading Larry Page’s book report, nothing was revealed. No monkeys were harmed in the making of this film. They weren’t helped much either. @stevegillmor, @scobleizer, @dannysullivan, @jtaschek, @kevinmarks Produced and directed by Tina Chase Gillmor @tinagillmor
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