Google's Race to the Moon

Internet giants back contests for entrepreneurs; Obama reaches out to small-biz owners on LinkedIn; advice on raising investment funds; and more

Sponsored Contests for Entrepreneurs

Two Internet giants are waving sizable cash prizes in two very different contests. The Amazon (AMZN) Startup Challenge is definitely the easier one, requiring startups to propose a business based on Amazon Web Services—development tools for building secure online storefronts and scalable infrastructure. Amazon offers the winner $50,000 cash and $50,000 in services.

The Google-sponsored (GOOG) contest (BusinessWeek, 9/14/07) dangles a $20 million grand prize to the first private company that can safely land a robotic rover on the moon and beam back a gigabyte of images and video to earth by 2013.

What Entrepreneurs Want from a President

Senator Barack Obama (D-Ill.) recently invited entrepreneurs to answer the following question on LinkedIn: "How can the next president better help small business and entrepreneurs thrive?" The most popular suggestions: Make health care more accessible to entrepreneurs and their employees, resolve the immigration-reform impasse, simplify taxes, and reduce regulation. One respondent suggests: "Return all control of the schools to the local communities so we can train the next generation of entrepreneurs."

A Budding Investment Boom…

Venture capital valuations of small growing companies are on the rise by a factor of about three-fourths, according to a recent survey. The law firm Fenwick & West surveyed 126 San Francisco Bay Area technology and life-sciences companies and found that during the first half of 2007 their second-round valuations over the first round increased by about 75%. According to a Fenwick partner on the firm's Web site, "The increase was driven in part by 12 financings in which the purchase price of the stock sold in the financing was at least three times higher than the prior round. Of these financings, seven were in Web 2.0 and related fields."

…And Possible Danger

Some professional investors worry that initial valuations are rising into dangerous territory. On the company blog, a partner with Lightspeed Venture Partners recounts a recent financial-services startup: "Although I really liked the company, I didn't seriously pursue an investment. The reason is that the $1.5M was raised at a $30M valuation. The company was still very early-stage, with very limited usage and an unproven revenue model. Any sort of investment that we would have made would have been at a much lower valuation than $30 million."

This partner's big fear? That the odds increased for a future "down round"—where financing comes in at terms worse than the previous round—or worse yet, no future financing at all. "When valuations creep up and are based more on future potential than past performance, more pressure is put on the company to hit its potential and justify its valuation. If things don't go to plan, when the company next needs to raise money it may not be able to justify its past valuation at all."

Three Realities of Raising Investment Funds

Despite rising valuations for some businesses, most startups seeking investment money will need to confront these three realities, in my experience (BusinessWeek, 2/24/03):

• The earlier in your business' life you raise money, the more of the company you'll have to give up. Conversely, the longer you can wait, and prove the business concept, the more the terms will improve.

• The earlier in a business' life you raise money, the less likely investors are going to want to apply investment funds to paying founders' salaries. The reason: Investors want entrepreneurs to "have skin in the game" via reduced salaries or a sizable investment of their own.

• The closer the startup is to actually making sales, the better the investment terms are likely to be. Investors don't like to fund ideas, but rather real businesses with real sales.

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