How are all these silly web startups raising so much money?


6

Forgive me if this is a duplicated to any other questions (which I dont think it is), but lately all I hear about is how XYZ web startup has managed to secure another 20 million in seed funding, etc etc. I read a lot of techcrunch.com (the home page is just filled with "X company raises Y million dollars") as well as Mashable.com, and they talk about that stuff a lot. Now I'm no one to judge the quality or utility of these websites, but very few of them seem groundbreaking or innovative. In fact, many seem quite silly. Sure they have their target audience, but in general many do not cater to a grand population of people.

So the question really is, how are these companies managing to raise so much money? It seems these equity firms and VC's are just dying to invest in something (maybe even anything). Is it about the people you know and the connections you have? A lot of this action takes place in California (Silicon Valley and surrounding areas), and I'm far away from there, and feel like I'm missing out on so much. I cant help but feel that if these silly ideas are raising millions of dollars, then so can I.

Equity

asked Jan 26 '11 at 01:31
Blank
Maq
197 points

3 Answers


5

Firstly, I'd like to clear some things away.

  1. There is (more or less) consensus that the bubble today isn't in the companies, it's in the Venture Capital (VC) market (see this post, and many like it). There is just more money out there than there are good companies to invest in. Apparently even more so in the Valley, since VC money are clustering there at an accelerated rate.
  2. Seed money (which you mention) isn't millions of dollars, and usually not VC money. Seed commes from Angels or Super Angels and are usually sub $1M, commonly around $100K. The funding stages are usually Seed, Early, Growth, (Consolidate), IPO. They are commonly known as Seed, Series A, B, C, consecutively. Where Series A is where the VC enters and it's usually the "Early" stage investment.
  3. I would bet you that if you came to Silicon valley investors wouldn't throw money at you.

Raising money is hard and it's an art form.

And be very careful at who you call Silly. I'm sure Facebook seemed very silly before they were where they are today. Also did twitter. And Why, oh why, would someone want to build a search engine when everyone was using Altavista?

But there is a good question here: How do you raise VC money (preferrably at a good valuation).

Here are some things that will help your chances.

  1. Build something real. The days of raising money on a business plan are (commonly) long gone.
  2. Having done it before. VC like people who've done it before. It's debatable if that makes sense, but I gather they hope they won't make the same mistakes twice. If you would research the companies you'll often see that they have experience from founding other companies, or having worked at VC funded companies. I've got a good friend (ex Google PM) who jokingly claims that "Anyone who's ever worked for Facebook can raise VC money today ".
  3. Prove that your idea is big. You have to convince the investor that there is a BIG opportunity and they it's within your reach.
  4. Prove that you have the experienced team that can both build this thing, and attract the right talent when you start growing and need to expand.

Basically, nail "Idea, Team, Execution", prove that you're unlikely to make common mistakes and attack a large enough problem.

For the VC, it's a numbers game. They plan on making one out of ten good bets. The rest of the companies either fail or don't return their money. The tenth company need to make 10x or more money.

answered Jan 26 '11 at 02:04
Blank
John Sjölander
2,082 points
  • Twitter is still silly :) – The Dictator 7 years ago
  • Possibly. We'll see I guess. :-) – John Sjölander 7 years ago

1

I completely (or at least mostly) disagree with the previous answer.

I say welcome to the next bubble (we've been through the first internet bubble - circa 2000 and the US housing bubble circa 2010). We are now well into the second internet bubble (I think a burst is due around 2012/2013).

Yes - there are companies that survive and even prosper (Google, Facebook, etc) after the bubble. That's because they managed to turn page views into $$. How much money does Twitter make per tweet? How much money did YouTube make before they were consumed by Google and adverts became standard on all video views?

I think the recent extravagance was epitomized by the app that made slide-shows from Wikipedia articles (QWiki )- $US 8M in funding and shortly afterwards someone showed how it could be done in less than 400 lines of HTML + JSS. Bit of a waste of $US 8M in my opinion (QWiki Clone ).

I do agree with the original answer in 'how do you tell what works'. Look at Twitter - certainly a game changer and something that has engaged the imagination of users. But where does the money come from? Have a valid answer to the last question and you may explain why and where VC's put their money.

In the meantime - follow your dream, build what you want to see and use, make it clean, usable and available and eventually you might get snapped up in one of the acquisition rounds. Try and design for it - you will most likely get ignored.

Disclaimer: I speak from absolutely zero experience in the VC funding/acquisition stakes. I'm in it because this is what I do and I love it.

Regards,
ShaneG

answered Jan 26 '11 at 02:40
Blank
Shane G
341 points
  • Bubble or not - what's you answer to "How do these startups raise so much VC money?" ... I think you answer Why very well. – John Sjölander 7 years ago
  • See thats what I mean about silly:Qwiki. They raised 8 million! This is what I meant by it seems like these people are just dying to throw money at something hoping itll become the next facebook. – Maq 7 years ago
  • Qwiki was cofounded by Louis Monier, who founded Altavista – a business that made millions for DEC and later Compaq. http://www.crunchbase.com/person/louis-monierJohn Sjölander 7 years ago
  • Previous good choices (by Louis Monier) don't imply subsequent good choices. Altavista had a great search algorithm and was backed by (at the time) a large company yet could not compete against an organisation set up by a couple of students. – Shane G 7 years ago

-1

Well the key seems to be - micro payments... so many sites and companies nowadays make a lot of money from micro payments - just look at FarmVille and other little games (don't just have to be games)...

Paying 1-5$ on something doesn't cost much effort on many people so they will pay... maybe even monthly...
Then put some mechanism in where you can invite others, compare with them or maybe even compete with them and you got it going. Many people wanna be the "best" so they spend money... it's not much... I mean what's 5$ a month?

But having a lot of people do this will multiply the money - the facebook strategy...

Sorry... maybe these are just the weird windings of my brain but thats how it appears to me...

answered Jan 26 '11 at 03:23
Blank
Evident
99 points

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Equity