Friday, May 09, 2008

Starting Findory: Funding

[This is a continuation of the posts in my Starting Findory series describing my experiences building my first company, Findory.]

I had the wrong strategy with trying to get funding for Findory. I pursued VCs instead of angels.

I should have realized, VCs would never fund Findory. From their point of view, there was just too much risk.

Findory was lead by a first time entrepreneur and was missing critical expertise in building a company. Findory lacked a full team; in particular, there was no finance, marketing, or business development talent. And, Findory had an unproven technology -- a specific technique for personalizing news, search, and advertising -- that is difficult for a VC firm to evaluate.

Had any one of these three been different, there might have been a better chance. A proven founder may be able to get funding with nothing more than an idea on a napkin. A strong team ready to go is an attractive investment for a VC. A proven technology that just needs the wind of capital behind it is an easy bet. But, with all three missing, there was never much of a chance.

Perhaps in the frothier SF Bay Area, this might have been different. Perhaps someone might have taken a gamble. In Seattle, there are only a half a dozen VCs doing substantial internet investing; most firms out of Seattle will not fund without a local firm joining in the round.

I did pitch dozens of venture capitalists in and outside of Seattle on Findory. It was a fascinating experience, educational, exciting, and often humbling. But, ultimately, I have to say it was a wasteful distraction from building things to help Findory readers.

I should have focused on angels. Not only would angels have brought the right amount of cash for short-term needs, but also the addition of experienced angels to the board would have provided valuable advice and connections. It would have been just what Findory needed.

I had thought that, with how far I had bootstrapped Findory, that I could skip a step and jump directly to VCs. That was foolish. Findory remained a long way from the point where the momentum would be so obvious that it would overwhelm the other concerns.

Instead of looking to VCs, I should have looked for an experienced angel, someone passionate about personalizing information, who would have given the startup the advice it needed while enjoying the experience of joining with us to grow the company.

Please see also Paul Graham's article, "A Hacker's Guide to Investors".

Please see also Paul Graham's article, "Why There Aren't More Googles", especially his discussion of VCs as tending to be surprisingly "conservative" and "driven by consensus".

Please also see the other posts in the Starting Findory series.

Update: Anand Rajamaran mentions this post and offers some good advice in his Inc Technology article, "Angel, Venture Capital, or Bootstrap?".


Anonymous said...

Mistake #1: Doing a startup in Seattle.
Not that it's not possible but it's a *steeper* uphill all the way by not being in the Valley.

Unknown said...

We're currently in talks with VCs, much earlier than expected. They've come knocking on our doors, and in the excitement, we've opened up that door. After reading this, I'm beginning to think we should just focus on angels as you say. That was the strategy in the beginning, and we let ourselves get distracted. Hmmm...dilemma.

Anonymous said...

Thank you for writing about your VC experience. I guess we learn best by doing. Now you know, and just by writing this post you are helping countless others. Consider it an expensive form of community service to other entrepreneurs. Thanks!

Unknown said...

Yeah... Wouldn't have Jeff Bezos been the most logical choice? But the ultimate problem is/was the revenue source, the business model, no? You really have to be very big to make meaningful sums from advertising, and getting to that size is not always fun and easy.

Anonymous said...

What a great post, and should be mandatory reading for all embryonic/very early stage start-ups. We experienced exactly this (being in a not disimilar situation to you), and whilst going after vc's was valuable in many ways it's been very wasteful from a time perspective. The angel scene where we are isn't exactly mature (for consumer internet), and that probably contributed to the vc-first strategy (angels are around though, just takes more networking/digging to find them). A few start-ups may get lucky with vc-first (but as vc's look later-stage/lower risk, this will diminish), but seems to me that the smart advice is angel-first, and if you meet any vc's who are interested during the process (as they invariably will be, as they'll want to know what you're up to if it looks interesting; don't confuse this with intent though) then that's fine. But don't make it the main focus.

Unknown said...
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Anonymous said...

Having spoken to and met with a few experienced VC's by this point, I would agree that most early-mid stage startups should be looking for angels.

Most VC's (and the kind of VC's you want to find) are looking for opportunities where the management team is in place, the product is tested, working and ready to be marketed to a wider audience. They can also help a maturing startup partner with and / or close the deal on a sale to a larger company. They are the icing on the cake you and your trusted angels are responsible for baking.

Thanks for the excellent article.

Anonymous said...

Just for a minute, reading the title of the blog post, I assumed that Findory had got VC funding.
I was happy for that one minute.

Anonymous said...

Please, what or who is an "angel"?

a said...

an., you ask what is an angel?

well, the answer can be found in one of the references from the post:

Anonymous said...

Greag, thank you for posting this piece. Inspired by your post, I wrote up my own analysis on whether founders should go the angel, VC, or bootstrap route: