The NVA Blog

There seems to be another chasm (in addition to Moore’s well documented one) developing in the tech start-up world. Maybe it’s been here for awhile, I’m not sure. In business terms a chasm has come to mean a logical gap that must be crossed to continue the growth and evolution from a new business to a more mature, sustainable one. This new chasm shows up earlier than Moore’s in the evolution of start-ups. It may be showing up more often now due to the continuing drop in start up costs and development costs to get a tech or web product developed. It also may be showing up more often than in the past as a result of the evolution in venture funding metrics and acceptable risk profiles.

This chasm may come in many shapes or sizes, but it can be described as the place in a comany’s evolution post-seed or angel funding but prior to any real revenue generation or customers. Companies on the approach side of this chasm typically need to raise more money in larger amounts in order to fund the customer acquistion strategies (marketing, sales, R&D to make the product production-ready) needed to prove the model or product works. Crawling their way up the other side of said chasm are the companies that have begun to operate like a real business (selling product, dealing with customers, etc.). Attracting fuding while on the approach side can be a challenge, and that is often when companies need the captial most. Ironic? Not really.
Understanding the dynamics of this may help you get across to the other side, and having a spotlight on it early on should influence your business planning, cash burn and fundraising strategy. Companies out looking for capital that are on the approach side or in the chasm may encounter hesitant investors or weaker responses then anticpiated. Lets take a look at why…

The Risk Level - With 1 in 10 (at best) venture funded start-ups making it, and the IPO market all but in stasis, the name of the game is demonstrating execution and validating the market and product through sales and customers or traffic. This time around (bubble 2.0, that is) hair-brain ideas are again able to find money, but smart investors demand real revenue and traction before handing over anything more than seed money. The no-mans-land of being post-idea formation and pre-revenue means that you have managed to get to first base and develop a business strategy and even some technology or service, but there is no assurance that your can generate meaningful revenue yet or that your strategy is going to work. Your technology or service may look good on paper, but you also have not proven it will meet customer needs and be compelling. VCs and Angels want to invest early in great ideas, or a bit later once the company has proven it can execute and the market is there. When you are in between these stages, your risk profile is even higher. The earlier you can begin to prove the model the smaller you make the chasm. Often we see smart, well-run companies stuck in between because they need the next round of capital to prove they have it right. Investors may say “call me back when you have 2 quarters of revenue and a distribution channel or partner”.

“In Between” Money - If you are taking an outside-in view of your business, and have realized that you need to raise money to GET to the market, perhaps you have found this new chasm. Companies in this spot are not ready to raise a large round for operational expansion yet, but they have burned up the seed capital getting to the edge of the chasm. They just need some fuel to get across. Every situation has its differences, but the themes are similar. In some cases, the timing of fundraising activity needs to be put in sync with the overall business plan and milestones. Knowing that investors tend to favor companies that are either sitting short of, or across this chasm can be very helpful. How you position the opportunity to investors and plan the use of the capital also becomes critical.

Tired cliches aside, it is all about having your eyes open when starting and growing a business from back-of-the-napkin idea to mature ongoing concern. Knowing what private equity investors look for in an investment opportunity and making smart decisions early on can mean the difference between never seeing your second round of funding or flying over the chasm without looking down.

Sphere: Related Content

Given the big money, epic wealth creation, and chernobyl-sized failures that are commonplace in the venture capital world, it is no surprise that this luminous industry has a mystique and draw to those that operate around it. As a company that interacts with both entrepreneurs and VCs on a daily basis, NVA has an outsider’s perspective on the industry.

Understanding the venture community is critical to working effectively in the technology start-up sector. Getting into the VC biz is very hard; it’s a small industry with very few entry points. There is no set formula (though many have tried to find it) to finding and funding the projects that will become the next Google or eBay. If you want to become a VC, there are two traditional avenues; previous home-run CEO/CXO gigs for venture backed companies, or paying your dues and having either Wharton, Harvard, or Stanford printed next to the words M.B.A on your resume.

If you have ever thought about becoming a VC (as I have), this post is a must-read courtesy of Jeff Bussgang who pens the “bostonvcblog”. Read Jeff’s About page for an example of the “right” VC pedigree.

A great way to keep an eye on the activity in the venture community is to subscribe to some of the daily/weekly email newsletters that cover venture and private equity. Two that I recommend are:

VentureWire Alert

P.E. Week Wire 

There are a few new blog posts out there this morning that resonated with me. Good food for thought for anyone already in, or getting into the “web 2.0 game”. There are a number of good questions/discussion points nested in these posts and related comments. I won’t repeat what’s been said - just take 5 minutes and follow the links below.

1. How many users/subscribers does it take to make you relevant?
2. Do you really understand your traffic? Do you know what that means?
3. Should you listen to your early adopters?

Josh Kopelman on the “TechCrunch” phenom
A VC’s musings on web 2.0
Brad Feld commenting on the above post threads

It’s amazing how things appear before you when you are looking…You know that cliche’ about being blind to a new car on the road until you start shopping for cars, and then it seems the car you are looking at is everywhere? The blogosphere seems like that sometimes.

I have been dialoging with a client of mine the past week or so on topics surrounding the pros and cons of starting a software/internet today and how to structure the company. Sure enough, while checking out new posts tonight I came accross this excellent post on the topic of The New Dual Track by Josh Copelman of Redeye VC on incredibly relevant topics. The essence of the post is that new funding and valuation models are emerging, and that the old “dual track” has been replaced by a new one thanks to lower technology and development costs, and a changing venture mindset. There goes that new car…
Here are some of the topics I’ve been discussing with my client this week;

• Angel or VC money? How much do we really need and what does it “cost” and “buy”?
• Technology Platforms - I’m a LAMP proponent for getting web apps online quickly and cheaply. It used to be proof-of-concept meant mock-ups and demos, today you can actually launch an online application or web service usable by a real audience in the same amount of time and get away with calling it a “beta”. <-- more on this later
• Structures and Valuations - too many tech businesses have been started with the founders or investors having pre-ordained exits in mind. Yes, starting companies designed to be sold to one of the 500lb gorillas has worked in the past. Today, you have to build a business on a solid foundation with a real product that generates revenue and does something useful. Not to say this is the rule, but it should be…

The tough thing about starting technology companies is that the answer to many of the fundamental questions is the same: “It Depends”. It used to be really tough to find any guidance or commentary of this sort online; it is great to see good posts (and comments!) on these topics sprouting everywhere in the blogosphere.

I wholeheartedly agree with Josh @ First Round on his posting about how to handle bad news. Too often fear of failure and personal pride gets in the way of effective communication in companies.

One of the things to watch is the “spin-o-meter”, that is the amount of positive spin being put on bad (or even just potentially bad) news that is relayed to the BoD or even the rest of the management team. You know what it sounds like…”Development is 3 weeks behind schedule, but we will make it up during the QA and Beta cycles” or “We missed our Q3 revenue target because or biggest deal slipped into Q4, but it will close in 2 weeks”. Hope is not a strategy… I found that a bit of pragmatism and honesty go a long way in driving effective communication.