aamir virani

Starting Up: What is the two-crime rule?

We went through a lot of iterations and tweaks while working on our pitch for Dropcam. One thing that friends, family, and investors liked is the initial market. At one point, though, we were trying to address concerns from an investor by discussing [our crazy new technology] and he stopped us immediately with:

Wait a sec. Now you’re breaking the two-crime rule. Do you know what that is?

No, we didn’t. What’s that?

Cops will often pull someone over for some minor offense like speeding or a headlight being out. That’s no big deal and you can usually work your way out of it… unless you’ve got some drugs in the car or are driving drunk. The second crime is the one that gets you locked up.

Huh?

Look – there’s enough uncertainty about your success in [market]. Now you want to add the complexity of [crazy new technology]? I know you guys are smart and can do a lot of stuff, but you just added to your degree of difficulty.

Obviously, this person didn’t invest… but it was some good feedback. Investors can deal with uncertainty surrounding your market or technology, but rarely both.

Starting Up: What type of funding should I look for?

One of the big questions we faced while going through a fundraising round is determining how much to raise.

During the 6 weeks we were looking for investors and advisers, we actually moved between a seed round in the hundreds of thousands to a series A for a couple of million to a “series A lite” around a million.

This movement between types is a siren call – as you get some interest you feel you should raise a little more. After all, more money is more runway. It’s more for hiring good people. It’s more for a nicer office. It’s more for marketing and business development opportunities. Right?

Elliott Dahan has a nice breakdown in a recent presentation of the difference between types of funding. Two things differentiating between a seed and funding stage?

• team vs. traction – if you have a product with users, a series A is much easier to attempt
• quick (< 1 week) vs slow turnaround – seed investors can move really fast if they are interested, while institutions will have lots of due diligence

My experience corroborated this. Angels would respond much more quickly than institutional investors. Usually the difference was one week vs about 3-4 weeks to go through the multiple presentations and interviews.

The current economic crisis, though, has made most investors more cautious. In fact, traction is now something even prominent angels want to see. One thing we heard: past small series A investments are now seed, while past seed investments are now going un-funded.

If you’re an entrepreneur looking for investment, realize that the road to financing is getting longer and more uncertain. It’s not necessarily that your idea needs work, it may also be that the investors you’re speaking to are scared.

Which angel should I talk to?

Crunchbase is a TechCrunch property that has a bunch of information on companies and startups. It’s user-edited (and based on a lot of TC’s posts). They also have an API, so I decided to work with the data to come determine who to talk to when you’re looking for money or feedback regarding an idea/company/startup.

Angel Suggestions covers some of the initial research. It uses data on people, companies, and investing groups to determine the angels you may want to talk to. There are three key questions it asks to get you started:

• What industry are you in? Obviously you’ll want to talk to someone who is in your area, like web, services, biotech, etc.
• What round are you looking for? If you’re just starting, there are three possibilities.
  
  • seed – Seed funding – you’re looking for something to get off the ground and want a minimal investment.
  • angel – Angel funding – you’re looking for a medium sized chunk along with the connections and expertise an angel can provide. He/she may ask for various things like a seat on the board or pictures of you naked.
  • a – Series A funding – you’re looking for a large chunk from a venture capital fund and will likely have to cede some control over your company

• How much money do you need? Obviously, this depends a lot on your industry as well as your underlying costs.

I used Ruby on Rails 2.0 to get going with this. It was awesome picking up some Ruby again and the Rails team has added some amazing functionality over the past year. The caching capabilities are much improved. Along with that, going through this helped me learn a bit more about Git, a relatively new version control system (like Subversion and CVS), and Capistrano, a gem for Rails deployment. Cool stuff.

The Four Things You Cannot Do as You Leave a Startup

Due to some recent work drama, I was privy to a list of key things you can’t do when you leave a startup. Here’s the list:

1. Don’t poach people (including a co-founder in a new venture)
2. Don’t take bizdev, IP, or other insider info
3. Don’t blast the company or its VCs in the press/blogs/media
4. Don’t shop your shares (exercised options) unless there’s a way to do it through the company

This list was described as a set of “social norms” within the Valley that are a “huge sin” if not followed.

The first item is the most surprising, as I constantly hear stories about friends leaving a company (both big and small) to go work on their own idea. It’s part of the myth of Silicon Valley, isn’t it?

#2 and #3 seem obvious and generally good practice in life. #4 I have no data points on.

If you have any feedback or thoughts, I’d love to hear it.

Funding Tips and Random Advice from STIRR’s DealHacks

Sanford Barr and the folks over at STIRR held another Founders’ Hacks night back in May. I finally got around to seeing the DealHacks writeup on their website, and it’s awesome.

Rob Hayes, a partner at First Round Capital and one of Xobni’s main investors, actually gave one of the talks. His main points:

• “I am often wrong but never in doubt.” – ok…
• “Can I work with these people for the next five years?” – founders should also ask this question
• PowerPoint: first – what you do, second – who are you, cover what’s your business model – which slide covers the mutual friendships?
• 1-2 founders, 3 is rough, no more than that
• “don’t ask for $3-5MM just because you hear that’s what you’re supposed to do” – this seems like it’s a response to the rise of angel investors and seeding groups like ycombinator

He goes on to mention angels who want a “restaurant” deal. What do you call VCs who don’t want to be lead investors?

Of course, you have to watch Adeo Ressi’s response – he’s the guy behind The Funded and a great counter-balance to the fluff VCs come up with. I’d pay to hear the stories he’s privy to. The idea of opening up the closed data loop VCs have is one I’m behind 100%.