3 posts categorized "July 2009"

Bootstrappers & VCs Meet on the TechFlash Commons

John Cook has wondered aloud on TechFlash why Seattle VCs don't blog. But John's blog, at least, appears to be an effective forum for VCs to address members of the local tech community.In a well written and telling post on TechFlash this past week, Rick LeFaivre of OVP drew some distinctions between the kinds of companies that will need professional venture capital investments, and those that might do better by bootstrapping. 

"One of the most attractive aspects of the Web services revolution is that a small team can create a cool company with very little capital investment, and if they hit it big with an interesting concept and keep their costs low, can start generating advertising revenue.

"The question is whether they can scale such a business to a substantial size (which, admittedly, need not always be the goal -- not every startup needs venture funding, especially in this space, and can have more modest exit goals than the typical venture-backed company)."

LeFaivre's article, together with the comment stream that has followed it, is whether the Seattle Startup Index is aptly named or shows the local tech scene to outsiders in the right light. But I am more interested in the background reasoning LeFaivre seemed to need to go through, in order to address what I take to be his understanding of the audience interested in the Seattle Startup Index. (There are companies on that list that are backed by venture firms, to be sure, but many others, including some of my clients, are not.)

So back to my train of thought:  what I find telling about the way LeFaivre frames the distinction - between startups that will need VC funding and those that will not - is that he postulates that the difference necessarily turns on the ambition and scale of the venture. Now, in many (most?) cases, this assumption may be fair. I'm considering in particular three companies I work with that have angel-financed themselves to profitability, but are considering taking on more capital simply to accelerate growth and opportunistically seize market share as competitors stand pat or scale back in the down economy. But I also find myself revisiting again the founding theme of this blog, the question of whether an exit strategy should be at core of the post-Ponzi economy investment model. What of ventures that scale, slowly or quickly, but surely, into high profit margin businesses that do not need to be flipped, ventures that generate cash and return investors' capital over the life cycle of the business?

One more "close read" of LeFaivre's quote above (I can't help it; I was a grad student in English and dabbled in post-structuralism before veering back to creative writing):  notice the association made linking Web services ventures with an advertising revenue model. Is that really the model of most Web 2.0 companies here locally, or is advertising a means of bootstrapping along the way? Even well-branded, oft-visited, content-rich publishers can't survive on advertising, but a renegade crew of less than a score might well mitigate their early burn by generating five- or six-figure ad revenue while they build their traffic.

Footnote:  TechFlash notes that LeFaivre's article is re-printed with permission of the OVP blog, which I did not previously know about. I'm checking it out now, and will add it to the list of links in the right hand side column.

Tide Turning, Exits Not the Focus?

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Along with @sleepless, @timu_matt and @johnclyman, I attended the Naked Truth event at the Olympic Sculpture Park last night, sponsored by Redfin, Madrona Venture Group, Fenwick & West and Square 1 Bank. The title of the event was "Show Me the Money," to capture the topic of revenue models for online consumer-facing businesses.  Exceptional entrepreneurs and bloggers were featured, and I was particularly pleased to be seeing and hearing @fredwilson in person for the first time.

The event was widely attended, enjoyed, and reported on, and Seattle 2.0 has now provided a way to watch videos of the event. I won't recap the panel's discussions here. 

I will note, however, that the focus was on revenue models, almost as if the assumption now is that ventures should be building sustainable businesses, rather than gathering eyeballs or pure market share (exception:  Fred Wilson, who is on the board of Twitter, said that Twitter still thinks it makes sense to pursue growth at all costs, then figure out monetization later). This all has implications for "exit strategies." As my loyal readers will know, the subject of whether or not "exits" should be a venture's purpose, or even an investor's goal, was the question that precipitated the founding of this blog.

One of the participants, Jonathan Sposato, the CEO of Picnik, summarized the take-away very well, guest posting on Gregory Huang's Xconomy blog:

"...I personally came away heartened by the fact that there is indeed a clear cultural shift towards revenue as a primary focus for Seattle’s startup community. I don’t recall hearing a single question about creating a startup to merely maximize for a speedy exit."

Not that the subject of exits, or preoccupation or fears about the lack of them, have gone away. This is the same week that Silicon Alley Insider reported that "VCs Are Very, Very Worried About Exits."

Terms of Service: Why You Should Write Them Yourself

Because contracts matter, Web 2.0 entrepreneurs will want to publish "terms of use" or "terms of service" (I'll call them "TOS" in this post, and they could include community guidelines or codes of conduct for users or members). The more effective TOS tend to be personal and reflect the character of the online business they represent. Here are some thoughts on why an entrepreneur should be directly involved in the shaping of the TOS for her or his business, along with a few "dos" and "don'ts."

First, permit me to step back and find perspective on the present moment in which we find ourselves:  At this yet still beginning stage in the development of the Internet (we are about 15% of the way into it), most Web 2.0 businesses are unique, often yet facing only a few, or sometimes no, competitors attempting things in quite the same way. Truer still, most social networks and many other online services will ceaselessly tinker with their offerings, at least until things click. Governments, taxing authorities, regulators and the courts scramble to catch up to commercial and other behaviors playing out online, but they are months behind the curve.  Byzantine, legacy political boundaries of the pre-Internet era threaten to choke optimal efficiencies, but at least some online business, probably the bigger ones, arguably have clout in determining policy.  

The situation presents the entrepreneur with both the need and the opportunity to tailor contractual terms to serve the vision of how her or his service might be used. And because many standards are in play, this moment in history affords an entrepreneur with an unusual ability to shape legal rights and obligations that may end up applying to her or his business and its users. (By contrast, many, many 20th Century industries are far past the point of being able to do anything other than follow and comply with long received norms.)  In short:  what you as a entrepreneur have to say about how the law should govern your business, matters.

That's the "why."  Now here is some "how to."

  • DO download, read, and annotate the TOS of a handful of your fellow travelers.

By "fellow travelers," I mean your competitors, maybe an up and coming company not directly in your space or in your face, and probably an established giant or two that you either admire or despise (the passion of your reaction is what makes the difference).

  • DO draft and post TOS with your beta releases.

If your site is accessible to the public, and particularly if you are accepting user generated content, you probably need TOS posted, even if you are ostensibly not yet releasing a commercial version of your service.

  • DO NOT copy wholesale or parrot someone else's TOS.

I don't really have to tell you this. Arguably, the inauthentic social network is no social network at all.  Put it this way: if you don't see TOS as an opportunity to speak personally and in the "voice" of the steward of your online community or your brand, just have a lawyer write them for you. A lawyer that works a lot for banks or insurance companies.

  • DO have your lawyer review your TOS.

Many elements of a TOS (rights to syndicate user content, DMCA compliance, disclaimers of warranties or obligations to police, limitations of liability, etc.) are not that difficult to draft or customize, but a lawyer that deals with such provisions or commercial contracts on a day to day basis is likely to be more sensitive to the already established or emerging legal implications (intended or unintended) of certain phrasings.

I should also note that your TOS may be more legal-intensive than most if you intend your site for use by children, or you permit minors to use the services. If you have or anticipate users in Europe, you may also need to deal with opinions about EU data protection law.

Most importantly:

  • DO do it yourself.

I say "do it yourself" to make the point that I believe entrepreneurs should "own" their TOS. If your lawyer is a particularly good writer, it's fine, and may even be most efficient, for her or him to take a crack at the first draft (that draft may have whole sections toward the back you may not want to change at all).  

Because legal fees are a concern, and most alpha and beta stage Web 2.0 companies are doing more and more bootstrapping, ask your lawyer to do the work for a flat fee, or cap the number of hours she or he spends on an iteration of the TOS. Some TOS are big projects. For one client, whose business model involved distribution of digital media and payment of referral fees to community members, a colleague and I spent a couple days architecting the rights clearance and payment and accounting terms. On the other hand, another (bold) client recently asked me to take no more than one hour to test kick a fine set of TOS he had drafted (okay, I took two hours, but I didn't tell him that).

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