Category Archives: Tech Business

The Psychology of Startup Funding (in a nutshell)

At the suggestion of an acquaintance of mine who works for a sort of an Angel / Incubation firm (they provide both capital and leaders for companies in their portfolio), I spent some time last month refreshing my understanding of the psychology and mechanics of startup finance. (Although my current company works with a number of startups as an outsource product development partner, and I’ve been involved in obtaining funding while working for startups in the past, I haven’t done as much recently.)

The tension between investor, founder, and customer creates an interesting drama. I don’t have the bandwidth at the moment to write much about the subject, but here’s the bottom line:

  • Startup founders must be passionate about their product and their customer, otherwise they aren’t likely to put in the effort and obtain the insights they need to succeed.
  • Investors, both current and potential, are passionate about acquiring as much of the company as they can for as little as they can spend, then selling the company for as much as possible as soon as possible.
  • Thus, while the compelling value proposition for the customer resides within the product, the compelling value proposition for the investor lies within the exit — the likelihood that more than one larger company is going to pony up a large sum of money for the company (noone IPOs anymore).
  • Being attractive to potential investors is important to keep in mind because you’re going to need them down the road and have to start designing the company around that need before you even start it.
  • When a startups needs money the most, investors will cheerfully take advantage of the opportunity to cut everyone else out of the picture (read about “down rounds” and “full ratchet dilution” for glorious examples that most non-finance folks find counterintuitive at first glance).
  • Thus startups need low “burn” relative to their current funding, to avoid finding themselves in the position where they have to give up a lot of equity just to keep the lights on. They also need to show ever increasing success metrics (numbers of users, gross revenues, transactions, customers, what-have-you) in order to keep investors excited about the exit.

While you’re waiting for more from me on the subject, check out this excellent series of posts in Brad Feld’s blog (Brad is a Colorado-based venture / angel capital guy with a huge amount of startup experience): Brad Feld’s Term Sheet Series (a term sheet is the essence of the deal struck between a startup and investors).


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A friend of mine recently interviewed for a fairly senior position at here in Seattle. So I did my networking bit gathering information and making introductions to help my friend assess this “match”.

Lest there be doubt in anyone’s mind, I can now assure you that Amazon acts like, and more importantly, sees itself as, a technology company. That retail thing they do is really just a test bed throwing off revenue that is plowed back into technology development. In tech circles around here, Amazon is seen as a peer to Microsoft, Google (which recently opened another Seattle office), Yahoo, and the like, because it behaves in much the same way in developing software products and buying smaller technology companies.

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Mobile Virtual Network Hang Ups

After not following the MVNO (“Mobile Virtual Network Operator”) space very attentively for a number of months, I was stunned to learn that Disney’s much celebrated Disney Mobile service is being terminated as a money-loser.

(MVNOs are companies that offer another company’s wireless service under their own brand — for example, people who had Disney Mobile service were actually using the Sprint network, but didn’t necessarily know it.)

Last year the MVNOs were supposed to crowd out the branding and marketing presence of MNOs (Mobile Network Operators, like Sprint, T-Mobile, Verizon, and AT&T Mobility) because the MVNOs (like Disney) “get” marketing, while the MNOs don’t. And I, like many others, found this intuitively made sense — I was just talking to another friend this morning who has a horrendous “customer experience” with his mobile carrier (I didn’t even bother to ask which).

But the truth is, MVNOs have been really stinking up the place. As reported by Cassimir Medford at, besides the demise of Disney Mobile, there was another Disney-owned MVNO that shut down recently — ESPN mobile. And besides the inglorious end of somewhat lower profile Amp’d Mobile, the really telling revelation was that Virgin Mobile USA announced, on the occasion of it’s IPO, that it had accumulated well over a half-billion dollars of debt over five years time. Since the Disney marketing juggernaut and Sir Richard “Marketing-Meister” Branson have are both taking this bath, I’m emboldened to say that the common wisdom about this marketplace is way off the mark. What happened to the walled garden, where a veritable monsoon of ringtone downloads and SMS overcharges reigns supreme, where the spoils belong to whoever can herd the most sheep in the gate?

Meanwhile, hardware manufacturer and yes, quasi-MVNO Apple Computer has put together an uber-MVNO business model based on a wi-fi enabled (albeit not open platform) device. As Ari Greengart deftly points out in his 10/1/07 RCR Wireless News article, Apple receives:

  • a hefty, non-disounted hardware margin on the iPhone (Apple offers no rebates or other incentives),
  • a share of airtime (voice and data) charges,
  • the ability to drive traffic directly to their lucrative iTunes service without first passing through their MVO partner (in the U.S., AT&T; in Europe, O2, T-Mobile, and Orange),
  • a share of music, movies and ringtones downloads revenue,
  • freedom from the responsibility their MVO partners must bear to acquire and maintain network capacity, and handle customer billing,
  • shelf space in their partners’ sizeable networks of stores.

As Ari says: “Wow.”

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INSANELY GREAT customer service.

Ordinarily I’d resist the temptation to borrow a corporate slogan without intending to parody it. But in this case the slogan and the actual corporate experience coincided perfectly: I recently had an insanely great customer service experience at the Apple Store in Seattle (University Village).

One morning a couple of weeks ago my iMac G5 wouldn’t start up. It was disappointing, as it’s been not only very useful but aesthetically pleasing on my desk for the past three years. But, I told myself, after three years components can break, they outdid themselves jamming all of that stuff into that little shell, I maybe dripped water into a port or covered the air vents or something hastening it along. But mostly I thought: Well, Apple isn’t what it used to be, they’re all grown up now, I guess I have to start lowering my expectations.

But because I knew that Apple Stores have customer service available, I Googled-up the local store and called to find out what my options would be. They scheduled an appointment for me, later the same day. I carried the thing in, waited a few minutes, and made my case to the “Genius” at the “Genius Bar”: See, the screen gets all pixelated and I get a kernel panic on startup.

The first nice touch: I forgot to bring in my power cord, they had one.

Second nice touch: I only had a wireless keyboard, they had a wired one, and by using both we determined that the thing crashed only when bluetooth was in use.

Now “the closer.” He asked me: Is it under warranty? I replied: No, I don’t think so, it’s almost three years old. Should I try using it with a wired keyboard for a while before deciding whether it’s worth fixing? He said: You could do that, but I think it might be under warranty still — let me check. He looked it up — it was. He checked the inventory system — they had the parts. He went to the back room and physically got the parts so that no one else could get them first. He told me he’d call when the repair was done. The call came later the same day, I picked it up that night.

Wow. What a shift from my initial expectations, “I wish I didn’t have to get a new computer today,” to “I just got a free upgrade, completed same day” (assuming the components they installed were at least as good as what I started with).

So, while I understand why even crazed Mac fanatics may be angered by Apple’s blatant running-up-the-tab-on iPhone early adopters (Nitrozac and Snaggy may be expressing just a tad of hostility with this Joy of Tech installment), at least for the moment it looks like Apple still “gets” the insanely great experience.

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My job

Besides natural curiosity — we live in interesting times, let’s face it — and a background in Internet startups, one of the reasons I track different emerging software technologies is because my employer, iLink Systems (located in Bellevue, WA, half way between Seattle and a certain software giant’s headquarters) builds custom software products.

Our work runs the gamut from mobile applications to business analytics tools, from user interfaces to integration of multiple server applications or databases into a unified system. So I wind up evaluating a lot of different technologies to see if they fit with existing / potential clients or could make the basis for productive partnerships or marketing campaigns for us.

Then there’s the legal aspects of what I do (contacts and such) — for the record, regardless of what you think personally of attorneys as a group or those you know personally, the quality of most contracts is really low (the word “sucks” comes to mind). More about this in future posts….

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