Tips for Tech Entrepreneurs: Moving out of the Coffee Shop

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At the inaugural SF East Bay New Tech Meetup last week, Lawrence Coburn, the founder and CEO of Rate It All, gave aspiring entrepreneurs some valuable tips for “getting out of the coffee shop” and getting VC funding. Coburn’s venture – Rate It All, an online distributed consumer rating company, that allows users to find, share and solicit opinions on any topic, completed a $1.4M raise in September 2008.

Here are 4 key elements, according to Coburn, that a venture needs in order to get funding:

Solid Team: When Coburn initially kicked off his venture, he had meetings with many VCs who liked his business plan but weren’t ready to invest in his company because he was a one-person operation. The reality is that it’s risky for VCs to fund solo operations because if the entrepreneur got “hit by a truck” tomorrow, the venture and their investment would go down the drain. So Coburn made the point that VCs are most likely to fund a venture with a solid team and a clear game plan for succession to keep things going if anything goes wrong.

Product: A key point that Coburn brought to everyone’s attention was that VCs will no longer fund business plans  or concepts, so the venture needs to have a solid product or service that’s marketable. Given the competition for the VC funds, having a plan is just not enough as the funding will go to an existing product or service with a clear marketing strategy because that translates into lower risk for the VCs.

Traffic: Even when Coburn was working out of a coffee shop, Rate it All was revenue generating, making over $200K and yet, he couldn’t get funding right away. So, while revenue-generation is great, but it’s still not a guarantee that your venture will get funded. Having a revolutionary product or service is a good first step but to get funding, entrepreneurs need to make sure they’re focused on generating traffic right away (and revenue would be nice too).

Comfort level and Trustworthiness: Last but not the least, VCs want to fund someone they trust and are comfortable working with. This was a very insightful tip by Coburn and that was VCs need to have a certain level of comfort doing business with you - the entrepreneur. It also helps to be known in the industry and connecting with influencers who can help your cause. Some ways of making those connections and increasing your visibility is through speaking engagements and attending networking mixers where you have the opportunity to meet some of the influencers. He also said that inviting some of these influencers as advisors on your firm’s board will also add credibility to your new venture.

Overall, it was a brilliant talk by one of Silicon Valley’s best and brightest entrepreneurs. Coburn also went on to list several key technologies that are revolutionizing the online space including – Facebook Connect,Posterous, and the very well-known micro-blogging site - Twitter. Despite all the new technologies on the market today, Coburn reiterated that email still remains widely popular and is the primary way folks share online content today. He also pointed out that 90% of Rate It All’s 1.3million traffic comes from natural search so businesses shouldn’t underestimate the power of SEO either.

Why We Care about Twitter revenue model

If it’s one thing folks in the valley and elsewhere in the blogosphere like to pick on, it’s Twitter’s revenue model or lack thereof. Techcrunch enlightened everyone today on the hoax by BBspot about Twitter’s purported premium accounts,

The author of the post mocks Twitter’s lack of an apparent business model after 3 years in operation, and writes that the startup’s CEO Evan Williams today finally announced plans to introduce a paid premium account scheme. Never mind that the news would have gotten broken on an obscure blog when the U.S. is mostly asleep, but other things should have given away that this concerns a hoax. 

Twitter revenue is no doubt a sensitive issue for the VCs who are coy on the subject. Last month, it was Readwriteweb who reported on a conversation with Todd Dagres, one of the investors in Twitter. Dagres laughed off questions on Twitter’s business model or lack thereof,

“We think it’s kind of funny…We know how we’re going to do it, and we’re very confident about how we’re going to do it, and it’s not necessarily in our interest to tell people how we’re going to do it.”

I can see his point of view, the VCs are probably thinking that here are a bunch of free-loaders (aka Twitter users) questioning our judgement. As if we would invest in something that didn’t have potential or didn’t have a plan to monetize it.

Note: Even if these VCs decided to flush a truckload of money down the toilet, it’s really their business and their stakeholders’ problem because they’ve invested money in the company, not the average user.

So why do we care so much about Twitter revenue and go into a frenzy every time someone mentions “Twitter” and “revenue” in the same sentence?

Twitter-envy:  Let’s start with the most obvious reason and that’s the good ol’ fashioned green. Many rational people with entrepreneurial aspirations are probably wondering – how on earth did Twitter get all that dough and other much-deserving startups didn’t? What makes Twitter so special? Also, Twitter’s growing popularity can’t be making folks on competing social sites, too happy either.

Curiosity is only human: While newly minted entreprenuers are looking for clues in the Twitter story, for what will get them funded, others are just …curious. Afterall, Twitter is the greatest phenomenon in recent history and everyone seems to be talking about. It’s shocking to the common Joe/Jane who aren’t as well-versed in the ways of the Silicon Valley as to why this “phenomenon” doesn’t make any money yet and has to be propped up through private funding.

It’s like crack: Let’s face it, Twitter is an addiction. Once you get going, it’s hard to stop. It’s not as if users were born with it or even grew up with it, we had to change our behavior around Twitter. This time, 5years back, how many people were thinking, “Hmm..I think I’ll send out a 140char message to (thousands of people whom I’ve never met ) about my imaginary cat.”  Twitter has changed the way we communicate and share information. So, naturally loyal users don’t want it to go down the tube, they want it to live long and prosper. In this day and age, how many brands can boast of such unconditional loyalty?!

Don’t forget the Twitter ecosystem: Let’s do a fun experiment. Google all the apps and sites out there that start with ‘Tweet’, ‘Twitter’, ‘Tw-something’. and count them. Thanks to the wonder that is an open API and thriving developer/entrepreneurial base, there are thousands of startups and related consulting businesses that are all based on one product and that’s Twitter. Can you imagine what would happen to these businesses if there was no Twitter? There’s an entire ecosystem built around one shining star and the possibility of that star failing is (and should be) making many folks nervous.

Lastly, nothing lasts for ever: ..and certainly not VC-funding. One doesn’t need to be a rocket scientist to know that if Twitter doesn’t make money soon or get acquired, there’s a good chance VCs will pull the plug . Of course, the assumption benig that VCs are rational businessmen and make these kinds of decisions based on a site’s revenue-generation potential. I mean, how many more years will the VCs continue to fund this non-revenue generating site? Afterall, this is serious business not a hobby, right?!

In any case, investors in Twitter should be grateful for the attention because it’s the buzz that’s going to keep this site alive and kicking. There is really no such thing as bad publicity and the last thing, any stakeholder in Twitter wants is the site to become irrelevant and out of the news.

Death of 'free' as a business model?

I looked up Techcrunch40 winners from 2007 to see how the winners have progressed in the last year.  (Agreed, this isn’t a statistically significant sample but given that these ventures received a ton of goodwill, funding, and publicity, one could argue that they had a high likelihood of success). Here’s what I found, many were VC-funded and 1 in 4 of the award-winning startups are still in beta, one year after being recognized for their potential.

Maybe I am missing something here, but isn’t one year an eternity in the online business for small and nimble startups with funding and fully-devoted, talented teams? Perhaps, I am being too aggressive but given the intense competition in the industry, shouldn’t startups and their funders be in a mad rush to get to revenue-generating state ASAP?

While I concede that without funding, many startups would languish and some infusion of cash is needed to sustain great ideas. One could just as easily argue that VC-funding is artificially propping up the weaker ‘species’, which should be eliminated through the process of natural selection ie. free market forces.

In all fairness, VCs don’t have a magic crystal ball to predict with 100% percent certainty as to which startup will fail and which one will succeed. They place some calculated bets and the ventures that succeed probably more than make up for the ones that don’t (if not, these firms should consider going into a different line of business). 

However, the bigger systemic issue is that funded startups can afford to give away their services for free but in the process they are creating legions of freeloading consumers who have no concept of paying for any of the services they consume. And how many startups can realistically expect to be sustained by ad-revenue alone? 

As a consumer I love ‘free’, but as an unfunded entrepreneur, I loathe ‘free’ because there’s no such thing as free when it comes to servers, engineering talent, office space, etc. and someone has to pay for these basic business necessities. I can’t help but wonder what it’s going to take to break this vicious circle of ‘free’.  How are the funded and unfunded startups planning to wean users off ’free’? Or is that the next startup’s problem?

For the self-funded startups competing with a well-funded venture, the challenge is similar to what mom and pop stores face when a mega-mart comes into town and slashes the prices to drive everyone else out of business. In the process, the mega-mart creates a monopoly or goes bust itself because the low prices are not sustainable. Neither scenario bodes well for the entrepreneurial community or the users. 

I am optimistic that the current economic downturn is forcing flight to quality and hopefully, we will see more startups that aren’t just a feature or utility waiting to be bought out by some mega-corporation, but rather a sustainable revenue-generating business that can stand on its own.