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For Web 2.0 biz, when you land on something great, you know it, so do the VCs, all within a very short period of time (anywhere from 3 months to 6 months, as illustrated by friendster, youtube, myspace, etc..) Most of the VCs in the valley are very good in spotting out that pre-dawn pattern and there is no free lunch in this world. If a VC is willing to buy you out at 20% of your company for a chunk of cash (anywhere from 500k to 2M), there must be a very strong reason for that and your company must be doing pretty good in either traffic or profit or both. If that’s the case, why bother to give out the ownership? Go to those angel dinners and get the 500k that you need to make it happen. Well, either way, if you want some introductions, email me at bb4433@mail.com with your web 2.0’s URL.

Thanks

Another approach appropriate in those very rare instances where clear marketplace and IP protected differentiation is present, is to set up a licensing/ partnership agreement; whereby the investing entity itself (or a new company/LLC it forms) takes on the responsibility for creating and running the actual company.

While very common in the pharma/bio/genetics field/s; where large companies like Amgen bring promising new drugs, etc which have been invented/ synthesized by small companies; there’s no logical reason why the same model can’t be replicated by qualified, forward-looking VC firms and established Internet leaders like Yahoo, Google, MSN, AOL, IAC, etc.

This is in fact the approach I’m taking with patent-pending paid match, the new PPC ad platform which will allow advertisers to select and bid on the actual traits and characteristics (keytraits) of their most desirable customers; instead of the words they type into search boxes as is done with paid search.

As we see from the successes the Amgens of the world are enjoying from an approach, the returns to the investors having such foresight–and operational capabilities–normally dwarfs the returns of the common “put up millions for 10-25% of a company” Internet/technology approach of today.

The difference I am seeing in today’s funding environment is that VCs are driving these liquidity options to gain ownership from founders.

Thanks and please keep the comments coming!

But..we are not able to dedicate the time we would like to our startup. As you mentioned the cost of building a start-up has fallen greatly so we are able to create and fund the company ourselves. It is just taking a longer period of time for us to generate the income to move to full-time work on our startup. This is where I see VC’s providing great value. If the VC can fund and also provide liquidity, by buying founder shares, then companies with founders who are working at well-paying jobs will be able to work on their companies full-time and have a much greater chance for success. To me this is an excellent reason to except VC funding. I would also be willing to lose some control to gain this higher chance of success.

One of the reasons we will be seeking VC funding in the first quarter of 2007 is to bring ourselves on full time so that we can drive the success of the business without worrying about our families. I think in general that VC’s do themselves a great disservice by ignoring startups with older founders. In fact, I think older founders need VC’s much more then younger founders and when you factor in their greater experience and drive to do well by their families it makes a lot of sense for VC’s to get involved.

Many VC’s say that only the young can build an innovative Web 2.0/tech startup. I have not found this to be the case. I have worked with several young founders and found that they are quite innovative but that they lack a certain overall view that could be the difference between success and failure. That said, I have also seen older individuals who lose their drive and focus because of the attention they feel they have to pay to their family. In the end it is always about the drive, the belief and the team. If the drive is there, the belief is strong and the team is strong then the age doesn’t matter.

Although I have jumped a little off topic the point I am making is that this is a really good idea, especially for a company with older founders.

Doug K.

The difference here is that it is coming out of the dark corners and becoming a regular part of the funding transaction.

As far as the comment about just give the founders a better salary, I would comment that one of the biggest debts the founder is usually carrying is a home mortgage. This is a certain amount of risk taken already, given the current home market.

If liquidity allows payoff of all or most part of the mortgage, a founder can breathe a lot easier. A larger salary will have to be really (unrealistically) large to make any dent in a home mortgage, especially here in the Bay Area.

So yeah, liquidity for founders (potentially) at each funding round makes sense.

I agree that we’re seeing more of this trend here at Lightspeed, especially with consumer internet companies since they take so little money to start. This has not been the case as much in other sectors. We’ve recently closed on financing where founder liquidity was a portion of the investment (company had been in business 4 years) and are in the process of closing a second (company has beenin buinsess 1 year). In both cases, our incentives were to increase our ownership levels and to better align our incentives with the founders who could now be more focused on building a big company. The founders wanted to diversify their risk since their net worths were largely tied up in the fortunes of their company which was private (and illiquid) and still risky. Everyone felt like it was a good result

Up to now, the creedo when it comes to launching a company has been “there’s no points just for playing”. Now, there would be.

I doubt a salary proposal would trigger the greed point, and would allow them to concentrate on their business, rather than on how many food stamps they have left for the week. It is likely that before receiving funding, the founders have already been suffering for a few months (or years), so why keep the suffering going?

No venture is equal, so it’s hard to make a rule that fits all, but in general, I believe in keeping the founders comfortable, which gives them no excuse to give less than 110% to the venture, and stay fully focused.

Agreed on greed overpowering other motivations – point well-taken. Concerning VCs “donating” money to investments that do not have a unique value proposition, lack revenue and have tons of competition… I’m not sure I subscribe to that investment philosophy.

Take care,

Allan