Leading Silicon Valley VC on what makes a start-up investable: Q&A
Monday, June 6, 2011/
Tim Chang is a partner at global investment firm Northwest Venture Partners, a Silicon Valley-based operation that manages more than $3.7 billion in funds.
Chang will be in Australia as part of a two-day mentoring session for local start-ups at the X Media Lab event, which takes place between June 10-12.
Here he gives his tips on what it takes to be a start-up that can secure funding from a large investor.
What is the one standout characteristic you think makes an entrepreneur successful in the digital media space?
Three key items:
- Ability to understand shifting power dynamics around distribution (eg. Forming and grabbing distribution muscle on new platforms like iOS, Android, Facebook, Twitter, Amazon, Cloud, etc);
- Understanding new pricing models such as freemium + microtransactions + subscriptions, and how to attract users into the top of the funnell, onboard them, engage and addict them, and then convert to paid;
- Instinctive feel for how media is changing from “consumption” of “media as a product” to “self-expression through aspirational and affinity-based experiences”.
What are the common errors that entrepreneurs should steer clear of?
1. Killer team and execution matters much, much more than the idea: ideas are not what matters – in fact, the best ideas and trends are often realised by multiple teams of brilliant entrepreneurs simultaneously, at which point only the caliber of the teams executing on the idea matters.
2. The goal is not to get the very highest possible valuation for each round of funding. Yes, I know this sounds self-serving as a VC trying to get good deals and reasonable prices, but entrepreneurs should think of the current round’s post-money valuation as the hurdle they need to leap over with the money being raised, in order to earn a huge step-up for the next round.
Here is an extreme example. Take a first time junior entrepreneur raising $2 million at $20 million post-money for a very early stage company.
The entrepreneur’s thinking may be, “Ha! I only gave up 10% of the company!”
Meanwhile, the $2 million runs out in a year, the company has reached product launch and some initial adoption, but no real revenues yet.
The CEO then finds that nobody is willing to pay up for a Series B, and he ends up taking a cram-down round at a $10 million pre-money, and getting far more diluted than if he had just started with $2 million on $4-6 million pre-money.
How would you describe some of the similarities and differences in the evolution of digital media compared with that of “traditional” media?
We’ve seen this movie before many times:
- Technological advances lead to new media formats.
- New media formats lead to new platforms of distributions and business models.
- Upheaval in distribution landscapes cause tectonic plate shifts in industry value chains: incumbents that can’t adapt go the way of the dinosaur (especially traditional “gatekeepers” as they lose power: retailers, middlemen, labels, publishing houses, etc), and new giants emerge when upstarts figure out how to quickly amass distribution power on the new platforms.
Same evolution playing out in gaming, movies/TV, print (news, books, magazines)…
When power is consolidated around a few central distribution gatekeepers, then media people run around saying “content is king”.
When platform shifts occur, VCs like me run around saying “if content is king, then distribution power is God Almighty”
What will you want people to take away from your session at X|Media|Lab: Global Media Ideas?
That it’s actually business model and distribution innovation that usually creates giant new businesses for start-ups playing in digital media, not breakthrough tech or killer content.
Also, the world of freemium, social, mobile, and gamification means that all entrepreneurs should juggle core skill set of killer product instincts, fast iteration, behavioral economics, and social psychology engineering and optimisation.
What is the one question a start-up should ask an investor before committing to a deal?
All money is equally green – how can you specifically help me get an extra advantage versus all the other investors out there?-