Early Stage Funder Survey – I would like to ask for the input of angels, venture capitalists, corporate development members, government affiliated funders and non profit funding agencies.

Here is the link to the Early Stage Funder Survey on SurveyMonkey

https://www.surveymonkey.com/s/earlystageinvestor

Entrepreneur Funding Survey – Please respond to this survey if you have received either No Funding or No More than One Round of Funding Do not count self funded or friends&family funding

Here is the link to the Entrepreneur Funding Survey on SurveyMonkey.

https://www.surveymonkey.com/s/EntrepreneurFunding

All responses are 100% anonymous. All responses are sent directly to SurveyMonkey

For the purpose of this survey, early stage investing is defined as funding startups that have yet to generate revenue/significant revenue or significant traction – concept, seed, alpha, beta, less than one year since launch. This can include rounds of anywhere from low/mid five figures up to $1-$2 million. This can include rounds from seed through Series A.

Please take some time to respond to this survey as it will help to make the university based academic programs and incubators much more relevant to realworld investors. And, all early stage companies need both validation and funding.

Thank you,

Elliott Dahan
Managing Partner
The Growth Group

The Triangle has always had bits and pieces of an early stage community. Over the past 5 or 10 years a lot of the elements have coalesced I’ve watched the Triangle nurture and retain homegrown entrepreneurs who will become the base for a new angel class that understands what you have to go through to build a successful startup. I’ve seen the local community center – the Council for Entrepreneurial Development – graduate from being a social institution to an organization that puts its entrepreneurs and startups in the forefront. I’ve seen landlord based incubators become for profit / money up from accelerators much like Y Combinator. There have always been the cornerstone academic institutions – UNC, NC State and Duke and for about 40 years there has been the partnering base of corporations in the Research Triangle Park. I’ve seen startup and entrepreneur become part of the local lexicon.

The most exciting thing I’ve seen is the North Carolina School of science and Math. “The North Carolina School of Science and Mathematics is a public, residential, coeducational high school for juniors and seniors with high intellectual ability and commitment to scholarship. It was established by the North Carolina General Assembly in 1978 to provide challenging educational opportunities for students with special interests and potential in the sciences and mathematics.”

All of these kids are real smart. All of these kids have the ability to write real solid code. NCSSM is the real engine of the Triangle.

That is not the point – the point is that they are young and untainted by the sense of entitlement and self-importance you find in a lot of Stanford engineering kids.

What they don’t have is an understanding of what you have to go through as a startup entrepreneur. This is not to say that the NCSSM is a tech incubator meant to crank out CTOs. It is simply recognizes the fact that some NCSSM students will want to become startup folks and they should go into it with eyes wide open.

How do you handle manic depression and paranoia ? How do you maintain a humility and openness while clinging to your Idea ? Will you truly appreciate the joy of collaborative commiseration with others trying to live in the startup world ?

I asked an NCSSM graduate to introduce me to someone of the Board of NCSSM because I wanted to talk about what the Triangle’s early stage community could mean to NCSSM and vice versa.

And Now for the Story – I told the NCSSM Board guy about the time, about 30 years ago, when we had the #2 consumer software company in the United States (behind Microsoft). We were in Mountain View and found a really good coder kid at one of the local high schools. He tried to get to our office after school every day but most of the time he missed the bus. He was a really good software kid. He was also a nice kid. We bought him a Vespa. He ended up writing the number 1 game at the time.

I suggested to the NCSSM Board guy that he let the NCSSM kids hang out / intern / do something with startups in Durham. Let these kids find out if the startup life is right for them.

The NCSSM Board guy asked me, “will you pay them?”

A question that really didn’t get the gist of what I was trying to say, but I figured out a snappy answer, “if they are any good I’ll buy them a Vespa.”

The NCSSM Board guy responded with, “we don’t let our students have motor vehicles.”

I’ve been thinking about North Carolina. I’ve been thinking about all the startup pieces that are coming together in the Triangle.

And then I thought about Garrison Keillor’s quote from his book, Pontoon, “old people don’t have answers, only stories.”

Go Heels.

The story of the Blind Men and the Elephant says that six blind men were asked to determine what an elephant looked like by feeling different parts of the elephant’s body. The blind man who feels a leg says the elephant is like a pillar; the one who feels the tail says the elephant is like a rope; the one who feels the trunk says the elephant is like a tree branch; the one who feels the ear says the elephant is like a hand fan; the one who feels the belly says the elephant is like a wall; and the one who feels the tusk says the elephant is like a solid pipe.

The King responds – “All of you are right. The reason every one of you is telling it differently is because each one of you touched the different part of the elephant. So, actually the elephant has all the features you mentioned.”

There has been a tremendous spurt in ventures that provide entrepreneur-to-angel-introductions (Angellist, Gust); angel-to-angel syndication (Angelpool); for profit and non profit incubator or accelerator programs and other partial elements of the total Early Stage Community.

Most of these solutions seem to be more opportunistic than substantial; more people centric than solution centric; more of the same early stage structure and process that simply tries to expand here and tweak there.

The Reality – The instant a startup takes funding from an independent investor(s) in exchange for equity, the measure of success for the startup is either an IPO or M&A.

Thus, a Liquidity Food Chain is established; starting with the Early Stage and culminating in a successful IPO or M&A.

Figure 1 shows the five stages of the Liquidity Food Chain: Exit and Pre-IPO are straightforward in definition, while Expansion, Growth and Early Stage are moving targets based on current market conditions.

Why the Early Stage is Unique

Linear Transactions vs. Dynamic Community: The four stages of the Liquidity Food Chain, Exit/Pre-IPO/Expansion/Growth – later referred to as EPEG – are all linear transactions –a Seller approaches a Buyer(s) and one outcome is desired. And, there is usually only a one time interaction. In the IPO stage a company goes to an investment bank and seeks money. In the pre-IPO stage a secondary market exchange such as Sharespost or Second Market is contracted by company insiders and personnel to sell private shares. In the Expansion and Growth stages companies approach Funders for additional capital.

All Early Stage Companies need both funding and validation. The members of the Early Stage Community (Validation Partners, Sponsors, Sponsored Companies and Funders) all have their own self-interests, their own measures of success and the members have dynamic and fluid relationships.

The members of the Early Stage Community are dependent upon each other for their individual needs. A Validation Partner may be interested in partnering with and investing in a Sponsored Company, but Validation Partners do not assume the hands-on / active company building roles of the Angel or the VC. The Validation Partner will co-invest with an Angel or VC – each doing what they do best and each getting what they want – the Validation Partner gets technology and potential employees while the Funder gets a portfolio company with credibility.

A Validation Partner may want to buy or partner with a new technology or business model to augment one of its corporate operating divisions and the next day, a Validation Partner may want to sell one of its in-house incubated startups. An Angel funder may invest in a Sponsored Company and the next day it may be looking for other angels to fill out the investment round.

A VC may be interested in a Sponsored Company but the company is not ready for a Growth stage investment. The VC partners with Angels to nurture the Sponsored Company until the company is ready for the Growth Stage. Angels might have invested in a Sponsored Company, built it to a Growth stage and now need to get additional funding/support from a VC.

Members of the Early Stage Community can assume different roles. An Angel investor can be both a Sponsor and a Funder. An incubator or accelerator that provides funding for its portfolio companies can be both a Sponsor and a Funder. A corporation which spins out an internal venture can be both a Validation Partner and a Sponsor.

Figure 3 shows some of the dynamic and constantly changing relationships among the members of the Early Stage Community:

the “Art of Investing” vs. “the “Science of Investing” As you ascend the Liquidity Food Chain, the decision to buy or invest is based more and more on facts and figures, and less and less on the personal, the experiential or the “gut”. In the EPEG stages each side of the linear transaction has a singular need – Sponsored Companies need money and Funders need profit from investment.

The IPO Exit is a detached event with S1s and Offering Statements and Analysts reports and public media outlets playing the major role in whether or not a person buys into the IPO. Well played PR and developing a cult following for a CEO might create a level of “irrational exuberance” (Facebook at $100 billion might be a good example of this. Surely the dotcom days of the late 1990’s and shining the post-IPO light on Groupon prove this point.)

The Pre-IPO Secondary Markets have a slightly less adherence on sheer facts&figures as the IPO stage. The buyer has to have a level of faith that public information and information disclosed to him/her is somewhat reliable. Most importantly, the buyer has to believe that the target company will not implode before the IPO.

The Expansion and Growth stages rely on various mixes of sales / growth / profit / market share metrics; continued innovation and product development; maturity and direction of management and flexibility of strategy to combat competitors and capitalize on opportunities. A Funder may be interested in metrics while a Validation Partner may only care about getting a particular technology or set of employees for their corporation.

“Who do you know ? Who do you trust “

The above quote is from the Angellist website. Angellist got it half right. Yes, the Art of Investing; the personal introduction and the proper referral are exceptionally important in the Early Stage, but the “who” includes not just a somewhat limited group of friends/investors, but also credible organizations and institutions. This becomes even more pronounced in this time of explosive growth of incubators and accelerators.

Technology is global – Entrepreneurs are global. A German drug company will search the world for new products, new patents, new opportunities. It cannot and does not want to waste its time on sourcing early stage developments. Therefore, knowing that a startup was spun out of Johns Hopkins or Duke Medical will generate a lot more interest than the latest offering from the Elliott School of Good Medicine.

The Early Stage includes many levels of product/team development. While the German drug company in the paragraph above may be interested in a patent and the team, others may demand greater product development, customer traction, team build out and even revenue before making an investment or partnering decision.

“Who do you know ? and “Who do you trust” can be both constraining and counterproductive if it becomes an end in itself.  Angellist, Gust and other entrepreneur-to-angel introduction services treat the “who” as an end in itself. . . . .it isn’t.

Shifting Self Interests

The Early Stage members are constantly shifting their affiliations and their alliances based on the current self interests. The main reason for this is which side of the table a member is sitting on in the Buy or Sell process. One outcome of these fluid relationships is that those who deal with at least a minimum of honesty and integrity stand a better chance of survival than those who place the short term ahead of the long term.

Reputation becomes crucial. The Early Stage Community is global and virtual, and reputation is viral, immediate and all encompassing across the entire early stage.

Crowdfunding will be one of the great avenues for early stage funding. A serious and valid concern for investors will be fraud. A global early stage marketplace that offers reference, background and global feedback from users will help calm some of these fears.

Observations:

1)     An efficient early stage demands a global marketplace; not a set of Seller/Buyer linear transaction sites.

2)     The early stage marketplace must solve the self-interests of all of its members in order to attract and retain an involved community.

3)     The strongest relationships are local and personal. But, they must not become provincial or self important. Technology is global. Entrepreneurs are global. Validation is global. Funding is global.

4)     The Early Stage Community is artificially constrained when “who do you know” is limited to a self defining set of members.

5)     The Early Stage Community will become more efficient with open communication and feedback between its members.

Conclusion:  The constraints of the current Early Stage Community cannot be removed until there is a truly global Early Stage Marketplace for funding and partnering.

Elliott Dahan is the Managing Partner of The Growth Group (www.thegrowthgroup.com) and the Founder of the Early Stage Marketplace (www.earlystagemarketplace.com)  He has sat “all around the table” in Silicon Valley’s early stage community for 30 years. Elliott’s latest adventure is as an Instructor in the Entrepreneurship program of Royal Roads University in Victoria, British Columbia.