[Originally posted on Tech.MN June 5th 2012]
I have never met Joe Serrano, but I must say that as a Minnesota angel investor and a Minnesota tech entrepreneur, I found his recent guest post titled “Dear Minnesota Angel Investor” to be grossly misguided.
In it, he begins by questioning whether Instagram could have been built in Minnesota, and comes to the conclusion that it couldn’t have because Minnesota angels are only looking for singles and doubles. He’s right that Instagram could not have been built in Minnesota, but I don’t see it being built anywhere else in the world outside Silicon Valley either.
Looking closer at Instagram’s funding, we see that their $500k seed round came from Andreessen Horowitz and Baseline Ventures on March of 2010. 500K could have been raised in Minnesota with some hustle (more on this later), however, even with this first small seed round we are already getting a big clue of ‘why not Minnesota’.
By adding Marc Andreessen, a board member at Facebook, the probable exit scenario starts becoming very clear, very early! They were predestined to raise a large round (as they did 11 months later with their Series A) and go for a large exit, as they did. This is the kind of insider baseball that regularly happens in Silicon Valley.
The reason for this is the later round capital needed for these hyper growth social businesses is not available for pre-revenue social businesses in Minnesota — or anywhere else outside of Silicon Valley. The folks in Boston which has a massive amount of smart tech talent missed the entire social movement too. It isn’t just a Minnesota thing, but pretty much the entire rest of the world, minus Silicon Valley.
Getting to the right answers requires asking the right questions:
Why do we not have a more vibrant community of angel investors in Minnesota?
(1): Lack of (enough) grand slams & home runs: Silicon Valley has created a virtuous cycle which folks in Minnesota don’t talk about. A friend of mine whom graduated in 2009 with a Bachelors degree in Mathematics from Stanford and immediately created a $1 million plus a year two person business creating casual iPhone games summed it up well. People outside of Silicon Valley think all the college grads coming out of Stanford immediately create their own start-up like he did, he said. But it’s just not true.
Nearly all of the college grads get recruited into Facebook, Google, Apple, etc. and plan on putting in three or more years vesting their stock options, and developing deep expertise in high growth markets before launching their first business. When these young stars go to cash in their million dollar payday, they now have the cash to invest in their business, the relevant expertise to inspire confidence from angels, and possibly enough money left over to throw some money into other similar businesses.
(2) Low Level of Market Expertise. What separates Doug Berg, founder of Jobs2Web (which later sold to SuccessFactors for one of the biggest exits in the past decade in Minnesota tech) and most of other founders in Minnesota? Prior to Jobs2Web, Doug cut his teeth with Techies.com. Although it was ultimately unsuccessful, he was able to develop a deep understanding of the jobs and recruiting market. This experience prepared him for Jobs2Web, although you don’t need to have a failure to develop market expertise. Go spend three years at one of Minnesota’s leading tech growth companies.
Since we don’t have Facebook, Zynga, Google, or Apple, these Minnesota growth companies are the best potential catalysts we have to become the big winners which spark the local angel market in a smaller but similar way as Silicon Valley’s blockbuster home runs.
Too many Minnesota startups are seeking (and expecting) funding without any proven ability to execute in their domain. This is related to point number 2. If you have been a meaningful contributor within a growth company, you’ll have no trouble getting funding without a super detailed business plan and possibly even without a beta version of your upstarts hot new technology. If you don’t have this proven track record, then you need to show your market expertise both in terms of financial assumptions but also in your ability to show a beta version of your hot new technology.
For those creating destinies, not excuses…
Start with your own capital. Don’t come asking an angel for their money until you’ve put in a substantial amount of your own money first. Yes, sweet equity counts, but you need to quantify this as much as possible by showing and explaining what has already been accomplished.
Establish a board of advisors. Take 2.5% of your upstart’s equity, and dole it out in the form of stock options at 0.5% vesting over 3 years to the 5 most successful, smartest set of board advisors in Minnesota and in Silicon Valley whom have perspective and relationships to help you grow your business. Set clear expectations of the time commitment (an hour a quarter perhaps, phone calls okay for out-of-state advisors, etc). Do this before raising money. This will make raising money much easier given the added perspective, and will greatly widen your network of potential investors as your advisors will be able to help.
Focus on key measures. Angels will want to see proof that you can execute, and that you have some idea of how you will create value.
Pre-Launch:basic, bottom-up key metric model stating your assumptions, and how they will create value. If you will have a revenue model right out of the gate, share it and be prepared to explain your key assumptions. If you are pursuing another way to create value like building out a massive user base like Instagram, share your key metric assumptions too (viral coefficient, engagement metrics, etc).
Post-Launch: show the growth in your key measures, be honest about which assumptions were wrong, which were right, and how the business is evolving. If you haven’t been able to demonstrate a growth model (even if the base is very small) don’t go asking for serious money yet. You are too early to be funded in Minnesota, unless you have very high market expertise.
Let’s stop complaining, and start taking action. Ask yourself: “What can I do to make the Minnesota tech community stronger?”