A Year In The Life of a Startup by Jeff Lynn

A Year in the Life of a Startup

Jeff Lynn26 October 2010

Three Lessons Learned

• First-ever equity crowdfunding platform– On-line platform that allows people to invest small amounts of money

in the equity of seed-stage startups– Think:

• Zopa, Kiva or Funding Circle, but with equity rather than debt• Kickstarter or IndieGoGo, but with returns rather than donations

• Co-founded with Carlos Silva last year– Started as part of a business school project– We quickly decided to do it full-time following graduation

• Platform is developed and in private alpha testing– Currently seeking regulatory approvals and Series A finance– Target launch 1H 2011

• We look forward to helping many of you raise capital!

About Seedrs

Lesson #1

When You’re Being Disruptive, Don’t Deal with Dinosaurs

Disruption and Dinosaurs:There Are Three Types of Startup

•Doing the same thing in an already-established field

•Examples: McDonald’s franchise; high-street solicitors firm; basic manufacturing firm using existing tech/processes

•Can be good businesses but usually not classic startups

Non-Innovative

•Taking a technology or business model to the next level

•Examples: HSBC, GlaxoSmithKline, Vodafone

•Tends to be where established companies have the biggest advantage, but many startups fall into this category as well

Incrementally Innovative

•Fundamentally changing the way people do things

•Examples: Ford Motor (1900); IBM (1950); Amazon (1995); Zopa (2005)

•This is where startups tend to have the most potential

Disruptively Innovative

Disruption and Dinosaurs:What We Thought• Seedrs falls into the “disruptive innovation” category

– We will drastically change how businesses get their first funding– We’re a big leap from what’s already out there

• When we started, we were looking for early funding and advice, and we decided to reach out to “traditional” angels and advisors– Largely older, non-London-based individuals– Most had made their money or gained experience in non-innovative (or

occasionally incrementally innovative) businesses• We targeted this group because we thought that, as compared

with the more sophisticated, tech-savvy London crowd, they would be:– Easier to get meetings with early on– More excited by something so new and different– More “serious” and able to devote real time and energy to working

with us

Disruption and Dinosaurs:How Wrong We Were

• This turned out to be a BAD IDEA: these individuals simply couldn’t process disruptive innovation

• It wasn’t even that they thought Seedrs wouldn’t work, but rather that they couldn’t understand it– Overwhelmed trying to figure out exactly how each process would work

as compared to what they’re used to– Couldn’t separate behaviour they would engage in personally from

behaviour a different type of customer would engage in – Kept trying to find ways to make us less innovative

• This was fairly discouraging for us– Any entrepreneur expects some people to think the business won’t

work, but we weren’t prepared for intelligent, successful individuals not to be able to comprehend it

– Caused me to question briefly whether we’d somehow lost touch with reality

Disruption and Dinosaurs:What We’ve Done Since

• Since then, we’ve focused on people who “get” disruptive innovation– Largely London (and Silicon Valley) based– Younger– More tapped into Web 2.0, social media and other developments of

the last decade• Some have loved the idea and some haven’t, but all have

been constructive– Understood what we’re trying to do– Engaged with us at some level about the substance

• Much better experience– Helped us both get funding and refine our model– If we’d gone to them originally, we’d have saved time and avoided

discouragement

Lesson #2

Truths and Myths in Seed Funding

Seed Finance:Important but Often Misunderstood

• We’ve spent lots of time talking with entrepreneurs about their views of seed-stage funding– First £100K or less needed to build a minimum viable

product or take another “first step”– This is the capital that gets a startup to later-stage

finance or launch – some don’t need it, but many do• Many misconceptions out there – Lots is written about later-stage finance– The first £100K is often ignored – assumption is that it

should just “appear”

Seed Finance:Finance Basics, Part 1

• Two types of corporate finance: debt and equity– Debt: contractual obligation

• Borrower repays specified amounts at specified times• Repayment NOT contingent on business’s success

– Equity: ownership interest• Investor has broad right to participate in business’s growth• Repayment ONLY if the business succeeds

• Everything else is:– Somewhere on a spectrum between debt and equity– Irrelevant to seed-stage businesses

• A word on grants and donations– They do exist– Unless your business is a social enterprise, they are nearly

impossible to come by

• Banks– Loans– Overdrafts

• Credit Cards• Friends and Family

Seed Finance:Finance Basics, Part 2

Debt – Types of Lenders

• Institutions– Venture capital (VCs)– Seed incubators

• Angels• Friends and Family

Equity – Types of Investors

Seed Finance:Some Myths

• Myth #1: Banks lend to startups– Banks almost never make non-recourse loans to startups, even in

the best of times– Entrepreneurs who get loans do so by pledging personal assets

• Myth #2: Many VCs invest in seed-stage companies– Most VCs are structured in a way that makes it nearly impossible to

invest small amounts – The key exception is seed incubators like Y Combinator and

Seedcamp – these are great, but there are only a few• Myth #3: Most angels invest in seed-stage companies

– Only 3% of UK angel deals are seed– Many angels want to see progress before investing (dreaded

concept of “investment-readiness”)– Finding the 3% that do invest seed capital is a random process

Seed Finance:Some (Qualified) Truths

• Truth #1: Equity is better than debt (usually)– If your business succeeds, equity will prove more expensive– BUT…if your business fails, debt can force you into bankruptcy whereas

equity can’t– Most startups have a meaningful risk of failure, and where possible it’s

better to share that risk• Truth #2: Friends and family are key (if they’re rich enough)

– The vast majority of external seed finance comes from friends/family– BUT…you generally need friends and family who can risk a minimum of

~£10K each• Truth #3: Mentorship matters (but it doesn’t need to be associated

with finance)– If you can get investors who also provide mentorship, great!– BUT…the two don’t really need to be associated, and so-called “dumb

money” is still useful if you combine it with mentorship from non-investors

Lesson #3

Don’t Pay Too Much Attention to Platitudes from People Like Me

• Hearing other people’s experiences in business can always help you shape your own– It’s the core of how business school is taught– Startups lack infrastructure, and this kind of collaboration among peers can be

extremely useful

• BUT...every business is different– The idea of saying there’s one right or wrong way to run a “startup” is kind of

ridiculous—every startup has different strengths, weaknesses and needs– It can get very frustrating and distracting to put too much weight (and action)

behind one view, only to be told the next week by someone else to do things completely differently

– This is true not only for talks by amateurs (like me) but also highly-experienced entrepreneurs and VCs

• You know your business better than anyone else at the beginning– So incorporate the advice where it’s useful– But take the definitive-sounding pronouncements with a grain or two of salt

Ignore the PlatitudesOr At Least Take Them with a Grain of Salt

Questions?

Contact Details

E-mail: [email protected]: @jeffseedrsWebsite: www.seedrs.com Blog: www.seedsofthought.net