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.

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.

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.

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.

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%.