How much funding does a startup need?

Great post from Marc Andreesen's blog: How much funding is too little? Too much?

Key take-aways:

How much money do you need in theory?

• Need enough money to get to PMF (product-market fit)
• Once you're past PMF, then you need enough money to fully exploit the opportunity

Risks of taking too little money

• May have unexpected setbacks (product release slips, competitor emerges, major customer loss, etc.)
• Funding window may not be open when you need money (startups from late '90s who raised money--like TellMe and OpenTable--are still around today, while their competitors ran out of cash)
  
• Global shock (e.g. terrorist attack)
  

Risks of taking too much money

• Dilution, loss of control
• Liquidation preference--raises the bar for how successful the company has to be
• Cultural corrosion

Cultural corrosion:

• Hiring too many people--slows everything down, makes it much harder to react and change
• Lazy mgmt culture
• Engineering team bloat
• Lack of focus on customers and products--easier to be completely focused on customers and products when you don't have a lot of money in the bank and you worry about the doors closing imminently
  
• Too many salespeople too soon--outselling a product that isn't quite ready yet, that hasn't achieved PMF--alienating early adopters and making it much harder to win them back when product is ready
• Product schedule slippage--what's the urgency? We have all this cash! Creating a golden opportunity for a smaller, scrappier competitor to emerge
  

Founders at work - PayPal and Hotmail

Started reading "Founders at Work." Here are some of the key take-aways from the 1st 2 chapters.

Paypal founder Max Levchin

• Paypal iterated through 6 different ideas/business plans. (1) They started with enterprise security on Palm Pilots. No traction with customers. (2) Then they went to consumer security on Palm Pilots. No traction with customers. (3) Then storing wallet information (e.g. credit card number) on Palm Pilots. No traction with customers. (4) Then storing all of your passwords (protected by master password) on your Palm Pilot. Some small interest, but no real traction. But getting more useful. (5) Then, store money on Palm Pilots. A lot more interest, lot more useful. But mostly still the geek crowd. Created a companion website to the Palm Pilot application. Realized that a lot of people were trying to use the website for transactions, growth of that was much more than Palm Pilots. People from eBay were contacting them and asking to put Paypal logo on their site. (6) Optimized website experience, shut down the Palm Pilot app.
  
• Key lesson: be willing to iterate your idea a lot. Keep testing with real customers. Each iteration should be more interesting and useful to customers.
  
• Core competency became fraud detection--that's what let them beat the competition over time.
• "Try to have a good cofounder. I think it's all about people, and, if you are doing it completely alone, it's really hard."
• "The hallmark of a really good entrepreneur is that you're not really going to build one specific company. The goal... is you realize one day that you can't really work for anyone else. You have to start your own thing. It almost doesn't matter what that thing is. We had 6 different business plan changes, and then the last one was PayPal."

Hotmail founder Sabeer Bhatia

• Built Hotmail initially on nights/weekends
• Started with the idea for personal database of information, morphed into web-based email
• Killer idea emerged because they were trying to solve a personal email exchange problem for themselves--they could access email only from 2 places (home, work). And at work, they couldn't access personal email accounts.
• Pitched the personal database idea to VCs, because they were afraid of someone stealing the idea for web-based email
• Didn't listen when VCs told them, "You're too young, you don't have enough experience, you're hardware guys not software guys."
• "You have got to own the customer... OK if you don't monetize them right up front. Eventually you will be able to. But having that customer base and being able to tap into that customer base and upsell them on services, or advertise--you can always make money off them." (Note: see Google!)
• "Don't try to change user behavior dramatically. If you are expecting people to dramatically change the way they do things, it's not going to happen. Try to make it such that it's a small change, yet an important one."
• Genesis of the idea: "That's when it occurred to us. 'Wait a minute, we can access any website in the world through a web browser. If we made email available through the web browser, that would solve our problem.' And then it occurred to us, 'If that would solve our problem, it would solve the problems of many others.' We didn't know how many others, but email was something that everyone used."
  

3 phases of a start-up (2)

We met with Randy Komissar from Kleiner Perkins last week. He gave us a lot of valuable advice about the 3 phases of a start-up.

Phase 1: demonstrate the value
Phase 2: demonstrate options for scaling
Phase 3: execute

Phase 2: demonstrate options for scaling

If phase 1 was all about demonstrating the value proposition for a handful of customers, phase 2 is all about demonstrating that this value proposition can scale across many, many customers (or across multiple products with the same customers).

For any company, there are 2 ways it can scale: either you scale across customers, or you scale across products. To scale across customers, you would need to demonstrate that your product can be sold to multiple customer segments (e.g. geographies, vertical industries, etc.). You would need to establish reference customers in each target segment and build a pipeline of potential deals. To scale across products, you would need to show that your existing product has line extensions that appeal to your existing customers. In either case, you're still not necessarily generating a lot of revenue yet. But you're creating the perception that customers are lined up to buy from you.

In general, what are the "pre-conditions" of an opportunity that make it likely to scale?

1. Homogeneity of customer needs: If every sale requires custom development, the business will not scale easily. On the other hand, if customer needs transcend segment differences, it means that you should be able to scale across customers.

2. No special/scarce resources required to make or sell the product: I evaluated a start-up company in the semiconductor services space for acquisition by a larger company. The start-up provided a useful and valuable service to its customers. However, the service was so complex that it could only be sold by 2 of the company's employees (the CEO and CTO). These 2 people were the only ones who understood the service well enough to convince customers to buy. Needless to say, the company did not grow very quickly.

3. Platform that will accommodate product extensions: This is Google's strategy with building the "Googleplex"--the computing infrastructure that consists of a number of custom-built, self-aware computer clusters across the world. Google believes that its Googleplex will be the platform that enables rapid, low-cost deployment of applications to customers--a significant advantage over competitors who use off-the-shelf computing equipment. Of course, first Google needs to develop another "killer app" other than the search and Adwords platform. But, once they find the other killer app, the Googleplex will be the platform that enables product extensions.