Archive for February 2009
VCs are interested in a startup’s gross margins because it can show the attractiveness of the unit economics of the business. One thing I’ve seen a couple of times is companies who have strong gross margins but those margins are a weighted average across multiple revenue streams or products.
For example, a product company may derive most of its revenue from selling product, but might also sell advertising or sponsorships on their website. Here we have two separate revenue streams with two very different gross margin %’s. The product business is going to have very slim margins while the ad/sponsorship margins will be quite high. If you blend them together (weighted for amount of revenue each product contributes) you may get a gross margin that looks attractive in aggregate.
However, I’m not sure that playing the blended margin game is a good one, particularly in an early stage venture. After all, most entrepreneurs and investors recommend that startups focus ruthlessly on one specific product. Spreading a startup’s limited resources across multiple products will dilute the focus on either individual product and my guess is that the aggregate gross margin would suffer due to that lack of focus.
Are any startups (present or past) playing the gross margin game successfully?
I love the nextNY mailing list-there are constantly gems that come across that are incredibly valuable to startups. This morning yet another one came through.
The Brooklyn Law School runs an incubator that represents interesting Internet, tech and new media startups for free if the venture raises compelling issues.
Apparently they also draft a lot of documents for early-stage startups.
I don’t have personal experience with the incubator but from what I’ve heard so far it sounds like a pretty awesome resource.
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- ACLU Looks To Brooklyn Law For New President (abovethelaw.com)
We recruit entrepreneurs.
We recruit limited partners who let us invest their capital.
We recruit teams who help the entrepreneurs we’ve already recruited succeed.
A VC is certainly an investor, but first and foremost they are a recruiter.
On Thursday, myself and a bunch of my fellow Columbia Business School young alums (Mark Davis of DFJ Gotham, Eric Wiesen of RRE, and Bronson Lingamfelter of Rose Tech Ventures) sat on a panel sharing our experiences and advice on getting a job in the venture industry. The key takeaways were (in no particular order):
- getting a job in VC is really difficult
- most of us didn’t get our jobs until right around graduation (or soon after)
- the terrible job market will certainly affect the venture job market and make it even tougher than it already is…and this year may not be the year to gamble that you can get a venture job
- if you don’t like networking, VC isn’t the job for you
- if you need a highly structured work environment, VC isn’t the job for you
- finding internships in VC is all about proposing structured projects that don’t require much time commitment from the firm and its partners
- the Kauffman Fellowship program is a good avenue to explore in addition to other VC job search efforts
I really enjoyed the panel and also met some great students afterwards that day and the next day at the VC/PE conference. Hopefully I’ll be able to participate again next year.
If you liked this post, and are interested in careers in venture capital, think about subscribing to my mailing list. I promise not to spam you and will only send information related to venture capital jobs and careers. Please input your email address in the field (and click ‘Submit’) below if you would like to subscribe.
I have always done a small amount of Google Adwords advertising (< $20 month) for this blog as well as my business school blog. Recently I’ve been hearing good things about the performance and cost of advertising on Facebook vs. Google AdWords. So, I’m going to give it a try and buy some targeted ads on Facebook with the hope of (cheaply) driving more traffic to my blog.
It’s also worth noting that although the advertising I purchase does send some small amount of additional traffic to my blog, the reason for me doing it is to be familiar at a hands-on level with the technologies that affect the industry. I’m definitely more of a hands on guy and the way I learn best is by doing it.
I will let you know how it goes!
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A venture capitalist I know once told me that he only wants to do competitive deals (deals in which there are more than one firm bidding to lead a round).
On the other hand, a guy I know who does seed investing who says he never competes for deals. Just doesn’t happen and it doesn’t seem to bother him, either.
As a newcomer to this industry I’m trying to figure out my philosophy on this topic. Are the best deals always competitive?
On the one hand, if you are the only firm bidding on a deal, the options for the startup are to accept your bid, try to negotiate (having little leverage), or walk. This would seem to be a good thing for the VC since they should be able to get the best pricing and terms. The flip side is that if you are the only firm bidding, the implication is that all the other VCs the company has spoken with don’t think the company is investment-worthy.
If there are multiple firms bidding on a deal, then the startup has the negotiating leverage. The entrepreneur can play the firms off one another and strike a much better deal than they could have had if they just had one termsheet. This will usually result in the winning firm paying a higher price (higher pre-money valuation and less degree of control) than they would have expected had the deal not been competitive. This also implies that there is market demand for a company’s shares. In an early stage investment market where < 1% of companies are able to obtain funding, maybe you could argue a deal that has multiple bidders is a good deal.
However, deals often become competitve once the first firm “jumps”. In other words, there may be investors watching a company on the periphery and waiting to issue a termsheet once they see another firm issue a termsheet.
In this case, the deal certainly becomes competitive, but is it actually a good deal?
I don’t know where I net out on this topic yet as an investor, but I can certainly tell you one thing. If you are an entrepreneur, you’ll end up with much better investment terms if you create a market for your shares.
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