Tag Archives: AVC

Crabgrass Theory of Tech Startups

I’m fascinated by Fred Wilson’s recent post he called The Darwinian Evolution of Startup Hubs, on his AVC blog from late last month. This is so much like my own sense of how it was, beginning with the first semiconductor companies appearing in what was then called the Santa Clara Valley in the 1950s. I was in elementary school then, in Los Altos, CA, where all this was happening. His summary:

In my mental model of Silicon Valley, the first ‘tree’ was Fairchild Semiconductor (founded in 1957) which begat Intel (founded 1968) which begat Apple (1976) and Oracle (1977), which begat Sun (1982), Silicon Graphics (1981), and Cisco (1984) which begat Siebel (1993) and Netscape (1994), which begat Yahoo! (1995) and eBay (1995), which begat Google (1998) and PayPal (1998), which begat YouTube (2005), Facebook (2004), and LinkedIn (2003) which begat Twitter (2006) and Zynga (2007), which begat Square (2010), Dropbox (2008), and many more.

I’ve compared this phenomenon to crabgrass. One plant generates others nearby. I think it must have been like this with auto makers in Detroit and steel in Pittsburgh, but that was well before my time. This is certainly what we saw in the Silicon Valley:

If you drill down a bit deeper, you see that the founders, investors and early employees generate a tremendous amount of wealth from these big successes. The later employees don’t make as much wealth but they do learn a ton and make enough money that they don’t need to work for someone else and so they strike out on their own and are often funded by the folks who made the big money in the prior startup. That’s how the seed drops from the tree and starts a new tree growing. This continues on and on and on.

Tree, crabgrass, seeds, and seedlings; sort of the same thing. And I’m seeing what he describes in the growth of other hubs too:

This darwinian evolutionary model of startup hub development is not limited to silicon valley. We have seen it play out in other places, most notably Boston, and increasingly in NYC. It is also playing out in markets like Boulder Colorado and Austin Texas and many other parts of the US and many parts of the world.

Fred Wilson’s VC firm is called Union Square Ventures, and Union Square, in Manhattan, is right in the middle of the growing New York high tech startup hub around Soho and the Garment District. Some call it Silicon Alley. And I’ve also seen this happening in Austin, and, although I don’t know Boulder, I do see Brad Feld’s Boulder influence spreading.

The big follow-up question is what can anybody do to break the cycle and speed it up and get some other location onto the same path. What starts it? What are the factors? 

And how do we get that here (wherever here is)?

(Image: bigstockphoto.com)

5 Non-Traditional Ways to Get Startup Money

So you want to start that company but you don’t have enough of your own money to do it. Most people think you either borrow the money or find investors, but neither of these are always possible.  You won’t get investment if your company isn’t investible.  And banks can’t lend you money on faith, you need a credit rating and some collateral. But there are some other ways to get that startup money.

  1. The absolute best startup financing is prepaid sales. Get a company that knows and trusts you to prepay services, or product development. Give one or more key customers an attractive discount for betting on you early. When I started on my own I sold a year’s worth of consulting, in advance, to the consulting company I was leaving; I accepted only half a year’s money, but it worked. It got me started. Later  I got large buyers to prepay software development in order to influence the product features they wanted. I know it’s hard, but it happens.
  2. Innovative non-traditional borrowing. Even though banks can’t lend you money if you don’t qualify, other people – angel investors, for example – can lend you money if they want to take a risk on you that way. Usually they’ll do it only for additional benefits to compensate for additional risks. That could be a high interest rate, or an “equity kicker” (a small percentage of ownership that they keep even after the debt is paid), or some portion of the debt that converts to equity (ownership). Look into convertible debt and warrants.  Fred Wilson had a very good post yesterday on Venture Debt, which isn’t usually applied to startups, but still, an interesting option.
  3. Percent of revenue, or royalties. This worked beautifully for me in the middle 1990s when I needed professional programming to help turn my business plan templates into Windows applications. I found a company that would work for a small fixed fee per month plus a small percentage of future revenue. Just last year I helped a friend find a fair way to pay a co-author without sharing ownership in her startup. She and her co-author were both happy with a long-term royalty arrangement.
  4. Do-now pay later. Offer somebody a contract for services paying a bare minimum now and then twice as much later on, as a balloon payment or a series of payments. Say you get a consultant to help you with your business plan and she’d normally want $5,000, but you offer her $10,000 if she can take it in 10 monthly payments starting on the third month. It can happen.
  5. Lease equipment. Leasing works best when a new business depends on relatively big equipment purchases: the trailer truck, the espresso machine, the dry cleaning equipment, for example. If you can qualify for the lease contract, you turn that big purchase into a long series of monthly purchases.

What Does Creativity Have to Do With Business?

What does creativity have to do with business? Business is about dollars and deadlines and suits, while creativity is about nerds and long hair and artsy-fartsy. Or is it?

As the digital technology revolution matures, it is becoming more about creativity and less about engineering.

That’s quoting Fred Wilson, venture capitalist and thought leader, in The Creative Phase last Saturday on his excellent A VC blog. This seems important to me:

Why the distinction between engineering and creativity? Can’t engineers be creative. Of course they can and are. Maybe there is a better word to use. But what I am trying to delineate between is the hard work of designing and building systems and the more abstract efforts to entertain, educate, and emote with these systems.

Looking over New York’s technology scene, he quotes an analysis that notes that New York University’s Interactive Telecommunications Program (ITP), a two-year graduate program in technology, is part of NYU’s Tisch School of the Arts, not the corresponding school of engineering, much less business.

Was it accidental or intentional the ITP was located in an arts school? I don’t know. I should find out. But regardless of why it was done that way, the result has been impactful. ITP churns out talented people who are half engineer, half artist. And the things they build reflect that view of the world.

Of course generalizations are dangerous, Success isn’t creativity vs. engineering; it’s different for every case. There’s also showing up, luck, hard work, and of course marketing and so many other factors. But I think it’s important to jar our assumptions a bit. Fred Wilson’s nod to “abstract efforts to entertain, educate, and emote”  reminds me on my favorite quote about software, from Stuart Alsop: “Good software feels like silk. You know it when you see it.”

And this all reminds me that some serious portion of what we now call the great works of art – all of Shakespeare’s plays, for example – were created by people who were doing it for the money.  It wasn’t the business of art, it was that good art was good business.

I think about some of my favorite tech products: software I use, websites … isn’t Google Earth, for example, more art than engineering? The original Macintosh? Even – and you’ll have to forgive me for this one, but I do love spreadsheets – the first VisiCalc?

On Fred Wilson’s 10 Ways to Start a Business

Hooray for Fred Wilson, a VC (Union Ventures) with a blog named A VC, for this brilliant 20-minute talk called 10 Ways to Be Your Own Boss, posted on his blog as online video. Fred calmly and carefully blows apart the way-too-common assumption that starting a business is about finding investors. He does this with a simple list of examples, each of which is a happy healthy business, most of which started and grew without outside investment.

He begins this talk with a couple of absolutely great quotes. The first, from a comment on Fred’s blog:

“Entrepreneurship exists in the tiny space between madness and genius; and its journey requires a few cross border violations across both madness and genius to get to the final destination.”

The second, from a tweet, shown here on the right, highlighting addiction to a monthly salary.

What I really love is the point he makes with the list. All 10 of these start-your-business instances seems perfectly understandable.

  1. The one-man show. He uses Matt Druge of the Drudge Report as an example.
  2. The two-man show with a partner.
  3. The husband and wife team. You already have a partnership. Assuming your marriage works, you already have a partnership that works. Designer and programmer, marketer and programmer. I know this one very well. Palo Alto Software started like that.
  4. The small office boutique. Fred says Union Ventures is one of those; six people. Small and happy.
  5. A federation of small businesses. He mentions Allen & Co., a New York investment bank. A lot of independents sharing a name and overhead. This works for professional services, like architects, attorneys, consultants.
  6. Projects: films, books, recordings … be an entrepreneur going from project to project to project. A good model for people with unique skills, if they can get work whenever they want.
  7. A cool website, as a small business, He mentions The Hype Machine at hypem.com, which started as a one-person website, remains small, but also profitable. It works as a one-person business, with some freelance resources, managed via laptop from places around the world.
  8. The small team bootstrapped startup. He shows redstamp.com, virtual cards that can be physical cards. This is a small-group quintessential startup, moving fast, flexible, having fun.
  9. The eventually-got-funded startup that started out as a few people working for free. Get it going, get it funded, then make it right.
  10. The startup that was spun out from another company. Twitter is an example. It was a piece of a business that got split apart.

That’s just 10, he says, and he limited his list to 10 only because he had only 20 minutes. He implied he could have gone a lot longer.

The point, made very powerfully in a delightfully cumulative way, is that only two of these 10 raised outside investment money. And one of those two got well on its way first, with people working for free, believing that the future would repay them.

One small detail that bugs me here is the “be your own boss” description of starting a business. I decided to put that into the 140-character tweet format as I was writing this. Here it is: