The Future of Facebook Ad Revenue: Small Businesses

Facebook hit all the right numbers during its most recent earnings call last month.

Revenue was up. Profit was higher than any quarter in company history. And user totals were up in almost every category imaginable, including monthly actives, daily actives and mobile.

It's a safe bet that Facebook will see even higher revenue growth in the upcoming quarter — the holidays always produce great ad revenue — but that's not the only reason to be optimistic about Facebook's future revenue stream.

The social network has 1 million advertisers on its platform, a number first announced in June, and double the number of advertisers from a year before, said Dan Levy, Facebook's director of small businesses. One million advertisers is an impressive figure. Equally impressive is that Facebook has 25 million small businesses with active company pages, which means only 4% of companies that use Facebook to connect with customers are also using the site to advertise. That's a lot of potential advertising revenue sitting close at hand.

"I think that there is a goldmine waiting to be exhausted," Wedbush Securities analyst Michael Pachter, told Mashable in an email. "The 25 million businesses with active pages clearly understand that having a presence on Facebook has value to them, and it is only a matter of time before a large number of them experiment with advertising on Facebook."

Pachter said he believes that as many as half of the small businesses on Facebook will eventually advertise, which would generate more than $1.25 billion in ad revenue.

There are a handful of reasons why small and medium businesses aren't advertising more on Facebook, Levy said. For starters, many small businesses don't have a product ready for an advertising campaign. Others may have only one or two employees, so finding time or resources to advertise isn't always easy.

Facebook is trying to prepare itself for when these businesses are ready to advertise. With SMBs, that means a simpler advertising interface that eliminates a lot of the work needed to set up a campaign on Facebook. Instead of having to specify age groups, interests or education experience for its target audience, a company can now write their post, and simply attach a budget to it.

Facebook then handles the task of putting the ad in front of the right users, mostly fans of the brand page and their friends, according to Levy.

In the last year, 62% of new Facebook advertisers have come to the platform through these simpler interfaces, Levy said, confirming the need for a simpler ad process for small businesses.

Pachter said that Facebook will need to experiment with other kinds of ads, including coupons and location-based advertisements. A success-based advertising model, where businesses are only charged if their ad brings in customers or sales, could eliminate risk and encourage small businesses to take the plunge on Facebook, he added.

The good news for Facebook: It has 24 million small business already using its platform. This means convincing them that Facebook can help their business is already complete.

"If you travel around to conferences and you talk to folks that work with small businesses, they tell you the hardest thing in the world is to get a small business to pay attention to you," Levy said. "For us, our potential clients are already on Facebook. They already get it."

Now, it's only a matter of signing them up.

References

Wagner, K. (November 23, 2013). The Future of Facebook Ad Revenue: Small Businesses. Retrieved on July 16, 2014 from Mashable. Link to website: http://mashable.com/2013/11/23/facebook-advertisers-small-businesses/

The Rhino Principle

There’s a certain rule in life that I’ve found worth considering. It particularly applies if you’re confronted by a crisis. I call it the Rhino Principle.

Now, the rhino is not a particularly subtle or clever animal. It’s the last of the antediluvian quadrupeds to carry a great weight of body armor. And by all the rules of progressive design and the process of natural selection the rhino ought to have been eliminated. But it hasn’t been. Why not? Because the rhino is single-minded. When it perceives an object, it makes a decision–to charge. And it puts everything it’s got into that charge. When the charge is over, the object is either flattened or has gone a long way into cover, whereupon the rhino instantly resumes browsing.

Few people think of learning from a rhino. But I have. And when I hear of an author who cannot finish or get started on a book, I send him (or her) a rhino card. I paint a watercolor of a rhinoceros on the front of a postcard–something I do well, as I’ve practiced it a great many times. And in the space next to the address I write: “Stop fussing about that book. Just charge it. Keep on charging it until it is finished. That’s what the rhino does. Put this card over your desk and remember the Rhino Principle.”

Sending a rhino card usually works. Now, the Rhino Principle may not produce the perfect book, but it does produce a book. And once a book is drafted, it can be improved, polished and made satisfactory. But if the Rhino Principle is ignored, there is no book at all.

This principle can be applied to many other things, particularly business. When an entrepreneur has an object in his line of vision, he should dismiss all other considerations from his mind, abandon all other activities and charge directly at that object, continuing to charge until the object has been secured. All kinds of qualities are needed to make a great businessman. But aggressive single-mindedness is by far the most important. Indeed, it is indispensable.

To what extent does the Rhino Principle apply to politics and statesmanship? In my view it applies with even more force. The story of Moses in the book of Exodus is an exposition on this approach. So is the monumental story of Alexander the Great of Macedonia and the destruction of the Persian Empire. Caesar’s conquest of Gaul, as described by himself, is another epic in the need to charge and keep on charging until the object is taken.

In the history of the United States one sees time and time again how success was achieved through the concentrated pursuit of a clear and definite aim.

The original settlers who arrived on the Mayflower observed this principle. They wanted the freedom to practice the religion of their choice, and to secure this they disregarded wealth, comfort and safety and worked toward their goal until it was achieved.

The American leaders who objected to George III’s government argued around (and beside) the point until they produced the Declaration of Independence. This was the moment at which America adopted the Rhino Principle: A salient object was perceived, and everything was sacrificed for its attainment.

Abraham Lincoln concentrated all his energies into one two-pronged aim: the preservation of the Union and the defeat of those trying to sunder it. He pursued this aim wherever it took him and never deviated from it, despite enormous difficulties and reverses, until the Union was triumphant.

Winston Churchill embodied the Rhino Principle. His objects were not always consistent–and they were sometimes the wrong objects. But there was always the same single-mindedness in his pursuit of them. In 1940 Churchill and the defense of freedom in Europe came together in a common destiny. I remember, as a boy of 11, listening to his broadcasts during that fateful summer and hearing my father say, “That man Winston Churchill has a clear aim and is very determined. That is what we need today.”

I’ve often noted that the statesmen who succeed on the big issues have a distinct vision of their goals combined with undeviating energy in pursuing them. Konrad Adenauer was one such example, Charles de Gaulle another. And in the 1980s two others who shared that trait, Ronald Reagan and Margaret Thatcher, joined forces to win the Cold War. Neither was very sophisticated nor subtle, but both understood the importance of having a clear aim and concentrating unreservedly on that aim until it was accomplished.

Is President George W. Bush cast from the same mold? I rather think so. I certainly hope so.

We can choose to lead quiet lives and get through them without achieving much. But if we want to do the big thing, if we hope to leave a record that will be admired and remembered, we must learn to distinguish between the peripheral and the essential. Then, having clearly established our central objective, we must charge at it again and again until the goal is achieved.

That is what the rhinoceros does. It may not be a model animal in most ways. But it does one thing very well. And that one thing we can learn: Charge!

References

Johnson, P. (January 30, 2006). The Rhino Principle. Retrieved from Forbes. Link to website: http://www.forbes.com/forbes/2006/0130/031.html

Top 5 Technology Secrets To Build Your Small Business in 2014

For the 23 million small business owners in the U.S. who compete head to head against big-box stores every day, technology is a vital tool that's leveling the playing field for Main Street merchants.

Armed with a tablet and a few key apps, today's small businesses can tweet the day's specials, process a customer's credit card, run a complex loyalty program, manage payroll and much more. These new tools are ubiquitous, inexpensive, simple to use and make it easier than ever to compete with huge corporations.

To ring in the New Year, here are a few ways to utilize new technologies to help increase profits and stay ahead of competitors.

1. Move your business to the cloud. For front-office management tasks, many small-service companies still juggle a combination of paper, spreadsheets and calendars to stay organized. This archaic system can present many issues -- everything from searching through endless file cabinets for documents to making it tricky to share information. Utilizing cloud services can help alleviate many of these hassles.

Related: 15 Useful Tech Tools for Your Business

There's a full-range of affordable cloud-based and mobile tools specially designed to manage customer scheduling, signups, time tracking and billing, among other duties. For example, app Front Desk helps personal trainers, dog walkers and other personal-service companies handles customer management and scheduling functions. For field-service businesses, like landscapers and painters, there isJobber, which assists with quotes and routes. Another tool is StyleSeat, a platform that provides personal-care businesses, such as salons and stylists, services like emails. 

2. Ditch pricy point-of-sale (POS) solutions. Tablets and smartphones with free or premium apps can now replace full-blown POS systems, letting small retailers accept more than cash. For example, everyone from your local coffee shop to your babysitter can use the tiny mobileSquare card reader on their Android or iOS device to accept credit or debit cards.

Also, for small retailers that want to cater to both online and physical shoppers, ecommerce platform Shopify's POS syncs customers and sales made online and in the retail location. 

My company, Financeit, lets small businesses offer monthly-payment plans for big-ticket items like high-end consumer goods and home improvement projects -- all from a mobile device.

3. Get on board with loyalty and rewards programs. Considering that a repeat customer has a higher lifetime value than a new customer, it pays to invest in customer loyalty. In the past, only big corporations had the resources to offer elaborate loyalty rewards programs, while mom-and-pop shops were left handing out paper punch cards, which would often end up lost in pockets, getting washed or trampled on.

Related: Data Crunch: 5 Analysis Tools for Small Businesses

Times have changed. Smaller merchants can now check out loyalty programs like FiveStars, Belly and Perka to create modern mobile loyalty and digital card programs at an affordable price. 

4. Turn to inexpensive tools for backend productivity. Traditional accounting and HR software used to be expensive and require technical infrastructure, but today, business owners can take advantage of easy-to-deploy cloud apps to run efficiently with their limited resources.

Startups have created useful tools that address specific needs, including FreshBooks or Wave Accounting for invoicing and accounting,Shifthub for workforce management and Intercom for customer care and user on-boarding. 

5. Take advantage of marketing and sales plug-ins. By adding a simple plug-in app, small businesses can turn their basic Gmail service into something even more powerful. For instance, usingStreak turns Gmail into a customer-relationship management tool, allowing businesses to track customers, active leads, deals and sales pipelines from the inbox. Other sales plug-ins include Rapportive, which provides detailed profiles on each contact, email-tracker Yesware and scheduling and reminder tool Boomerang.

These are just a sampling of the many apps that small businesses can use today to get ahead of their larger competitors. The bottom line is that small organizations no longer have to go it alone -- there's an app or technology out there for virtually any business need.

References

Garrity, M. (December 26, 2013). Top 5 Technology Secrets To Build Your Small Business in 2014. Retrieved on July 3, 2014 from Entrepreneur. Link to website: http://www.entrepreneur.com/article/230522

10 Things A Startup Founder Learned About Money While Backpacking Around The World

In 2012, Jason Vitug found himself on top of a temple in Myanmar.

"I realized I was living a childhood dream," he says of that moment, near the beginning of his year-long, 21-country travel adventure. "And I started wondering why I was the only one there. "

That epiphany became the first seed of his financial education website, Phroogal, which crowdsources high-quality answers to anyone's burning financial questions in order to help them afford the lives they want to lead.

Vitug on top of an ancient temple in Bagan, Myanmar.

Vitug returned from his trip ready to help others have their own top-of-temple moments.

Traveling through countries including the Phillippines, Singapore, Malaysia, Thailand, Laos, Brunei, Timor L'Este, and Belize, "relates a lot to how I view finances now, and what it truly means to live life rich," he says.

Here, Vitug shares the personal finance lessons he absorbed on his way — along with photos of some memorable moments from his trip.

Click here to find out what he learned (and saw) »

References

Kanne, L. (June 16, 2014). 10 Things A Startup Founder Learned About Money While Backpacking Around The World. Retrieved on June 19, 2014 from Business Insider. Link to website: http://www.businessinsider.com/money-lessons-from-traveling-the-world-2014-6

3 Mistakes Successful People Don't Make

There are a lot of things that contribute to success. But a few things are universal barriers to achieving it, says Bernard Marr, a bestselling business author and global enterprise performance expert, in a recent LinkedIn post.

Falling into these traps can put "roadblocks on your path to success," he explains. 

In Marr's observation of successful people, he has noticed a few mistakes that they tend to avoid. Here are three of them: 

Mistake No. 1: Following the trends.

In the words of Jack Kerouac, "Great things are not accomplished by those who yield to trends and fads and popular opinion."

Marr says we often feel like we have to jump at every new development, and try every new "thing." "We sometimes call it 'shiny object syndrome,'" he says. "But jumping at every new thing will leave no time to develop the deep understanding that pursuing lifelong learning might."

Instead of buying into the latest trends, focus your energy on understanding the root of what you hope to succeed at, and ignore the rest, he says. "For example, if you hope to succeed in sales or marketing, you might choose to study human psychology rather than the latest social media marketing schemes."

Mistake No. 2: Refusing to take responsibility.

"One of the first things you will notice that successful people don't have is a blaming or victim mentality," Marr says. When things go awry, successful people won't say, "I couldn't succeed because of X," or, "It's actually John's fault." Instead, they take responsibility and own their mistakes.

"I believe the key here is that by owning a mistake, we are more likely to learn from it and much less likely to repeat it," he says.

Mistake No. 3: Trying to go it alone.

One of the most critical things successful people do is surround themselves with other successful people, Marr explains. "No man is an island, and having a network, [or] a mastermind group, surround oneself with clever people can make all the difference between success and failure."

Marr says avoiding these mistakes can help you succeed at work, or a single goal or task — but to be truly successful, you also need to be happy. "Only when you make happiness and balance a goal can you truly succeed in any other area of your life," he concludes. 

References

Smith, J. (June 11, 2014). 3 Mistakes Successful People Don't Make. Retrieved  on June 12, 2014 from Business Insider. Link to website: http://www.businessinsider.com/3-mistakes-successful-people-dont-make-2014-6

The Rise of The 'Uberized Economy' and What it Means for Business

The world of labor is changing. Through laptops and mobile devices, a new world of services is becoming more accessible. The platforms enabling such services are also providing new homes for a rising entrepreneurial class of worker who is no longer being defined by the cubical. It’s becoming clear, that in a not too distant future, our companies and corporations will be built on virtual networks vs marble lobbies.

While we have seen an explosion of “Uberized” labor marketplaces that make things like grocery delivery and home cleaning a mobile click away, labor marketplaces are quickly moving in more sophisticated directions.

While the oDesks of the world have defined “virtual labor” for the past decade, a new generation of virtual labor marketplaces is rising – even in the most old-school industries – and unlocking highly skilled services in a whole new way.

Our vision of the future is that these vertical marketplaces will make even the most white-collar professions accessible to every individual and business, and will provide new homes for highly skilled individuals where the traditional corporate life is no longer a fit or an option.

The rise of online labor & limits of horizontal marketplaces

The world certainly seems to be viewing online labor differently these days. Thanks to increased demand for, and access to, online workforces, the value of the online labor market reached $1B in 2012, and is projected to hit $5B in 2018.

The rise in online labor seems to be paralleling the general increase in freelance labor in a sluggish economy. “Between one-fifth and one-third of American workers are now freelancers, contractors or temps,” according to Accenture.

Up until a couple years ago, most online labor had been contained within large horizontal marketplaces like oDesk and Elance, which, for the most part, were the first entrants into the online labor space. Even hyper-localized labor started on horizontal platforms like TaskRabbit.

But, horizontal marketplaces are just the first chapter in a multi-trillion dollar story. While horizontal marketplaces can make sense for many types of labor, they have their limitations within certain verticals. These limitations include inconsistent product experiences, demand- and supply-side quality control, and a lack of specialized resources for skilled providers to improve their delivery of service.

Entrepreneurs are now focusing their attention on the specific problems within these niches. But, some of these verticals represent billion-dollar opportunities like medical, legal, and accounting.

Vertical over horizontal

Vertical marketplaces present numerous advantages over their horizontal counterparts for both consumers and service providers. Simply put, vertical marketplaces can focus on getting few things really right rather than doing hundreds of things decently, resulting in a better experience for both sides.

While these vertical marketplaces are still in their infancy, some of the deliberate differentiations they are making from horizontal marketplaces are becoming standard practice.

Consumers: Standardization & increased trust

Many of the successful vertical marketplaces are taking steps to dramatically differentiate the experience for consumers from the Wild West of horizontal marketplaces. Two of the biggest changes that these marketplaces are making are process standardizations and increased focus on enabling trust.

The traditional RFP process, seen in an oDesk-like model where a user receives 20+ bids, is a slow, variant and sometimes jarring experience. While maximizing choices for a customer, it is not always the most optimal experience. Sometimes fewer choices are favored over other experiential elements, and can improve convenience, speed and simplicity.

This is why vertical marketplaces are making more of the decisions for you. Scripted, a written-content platform for businesses, is a classic example of this shift. A user of Scripted merely needs to pick the type of written piece they are looking for (i.e. blog post, tweets, white paper, etc.), and Scripted does the rest by setting pricing, a defined scope of work and an assigned writer for the project.

Through oDesk’s RFP process, this could take up to three days to just to get the project started. With Scripted, you can get your project started in one sitting, and in under 15 minutes.

Vertical marketplaces are also going out of their way to create trusted relationships with their customers. Guarantees, ratings, transparent pricing, great customer service and company swag are just some of the things these companies are doing.

At the end of the day, however, it is all about quality. Tim Ferris, the author of the 4-Hour Workweek, admits that oDesk can require churning through a few people before you find someone good. For more trusted activities, many consumers are not willing to throw chance to the wind.

As vertical marketplaces move into more sophisticated disciplines, the need for quality will be a necessity with users, who cannot risk a bad experience.

Service providers: Dual curation & commonality

As more and more service providers take their practices online, they too are looking to create long lasting relationships with customers. Just as consumers wish to avoid low-quality service providers, service providers wish to find high-quality, reliable clientele.

This parallels providing high quality to customers. You can only attract the best service providers by providing them great clients to work with.

Vertical marketplaces also provide a consistent environment themed around their service providers. This offers two distinct advantages.

First, service providers can access tools and resources within the marketplace that are consistent with their profession. Not every profession needs a time-tracking tool, and some industries have specific regulations on how their craft can be performed, requiring a customized experience to accommodate them.

Medical marketplaces, like Healthtap for example, must comply with HIPAA regulations in order to protect their doctors. Secondly, providers within these marketplaces can access a common community for overflow work and industry knowledge (something most people leave behind when they exit a firm).

Accessing a community for knowledge and interaction is a huge perk for the growing class of independent workers.

The new “firms” of the future and their impact

For centuries, we have relied upon brick-and-mortar professional institutions to deliver trusted services and employ the masses. But, as vertical marketplaces move from the simple to complex, it seems that these traditional bastions may be facing the same fate as brick-and-mortar retail ten years ago.

It’s not inconceivable to think that the world’s largest accounting, marketing and law firms could one day be vertical marketplaces built on software. We see this as a good thing. One of the major themes these new labor marketplace share is their ability to provide access to services that would otherwise be too expensive or inconvenient to procure consistently.

In the small-to-medium business world, increased access to these core services is vital to growing businesses and a thriving economy. Virtual marketplaces will make available powerful resources that only large corporations have traditionally enjoyed. SMBs are thus equipped to better compete with very large companies, harnessing what General Catalyst Partner Hemant Taneja refers to as “economies of unscale.”

The future certainly looks bright in our eyes. In coming decades, vertical labor marketplaces will open up important resources for consumers, and hundreds of thousands of employment opportunities for the growing freelance community. It’s the global flywheel at the heart of our new labor economy.

References

Faustman, M. (May 18, 2014). The Rise of The 'Uberized Economy' and What it Means for Business. Retrieved on June 3, 2014 from TNW. Link to website: http://thenextweb.com/entrepreneur/2014/05/18/rise-uberized-economy-means-business/

The Dream Office of the Future: No Email!

Asana Media Kit

Asana's Dustin Moskovitz and Justin Rosenstein are both from Facebook.

You’ve heard of B.Y.O.D.? That’s Bring Your Own Device.

It started when office workers ditched the company Blackberry and shelled out their own money to buy an iPhone for work. And that helped bring mobile computing devices into the workplace. Right now, there's another trend reshaping the workplace, says Tom Eich, the head of the digital tools practice for the design consulting firm IDEO. That trend is called B.Y.O.S., or bring your own software.

"It's also called the consumerization of IT,” Eich says. He notes that in the not so distant past, if you wanted software for work, say, like Powerpoint or Photoshop, "you used to have to go to your IT guy to get a licensed version on your computer."

Now you can find everything online and most of it is free. Office workers are turning to Dropbox instead of FTPing files to the company server. They're ditching Word and using Google Docs, when they need to share. And they're often doing it without asking the IT department Eich says this shift in buying power is what's whetting investor's appetites.

"And a lot of the more interesting innovations are entering through the consumer channels first," Eich says. 

In other words, start-ups are more focused on worker's needs. High up on that list of needs: getting rid of email.

"People are complaining about how much email is dominating their lives," Eich says. "So there's a need there that'll definitely push companies to find better solutions."

I went to check out Asana, one of the many startups in the Valley that's working on what's now being called "productivity software." Asana's co-founder is Dustin Moskovitz, who's also a co-founder of Facebook. The social network's unofficial motto is "move fast and break things." And in those early days, it was Moskovitz's job to keep Facebook moving fast.

"And I would spend a lot of my day trying to figure out what was going on," Mosiovitz explains. "And that's when we got into the pattern that most companies still use today which is just sending around a lot of email threads."

Moskovitz went looking for a software tool to help him coordinate people and projects but he couldn't find one and so he started writing a program himself. He says, engineers at Google, Apple and other tech companies have done the same thing. And those management tools have cut down on email and workers are more productive.

Moskovitz thinks these tools are part of the secret to Silicon Valley's success. And he wants to sell them to businesses around the world. And in the Valley, it sorta feels like everybody is using Asana, including start-ups like Uber, Airbnb, Nest and Pinterest.

When Pinterest's head of products Tim Kendall joined the company last year, they were 18 employees. Today, there are about 250.

"A lot of our projects require product design, they require engineering, they require marketing," Kendall says. "Tools like Asana can allow you to track all those different components that need to get executed to build and launch a product."

Kendall flips open his Macbook Air and shows me how Asana works. On his screen a dashboard, which shows all tasks, correspondence, check-ins, to-do lists -- or all the information he needs to manage a project -- on one page. I asked him how this was different from creating a Google docs list?

"It just has more flexibility," Kendell said and explained how he can re-organize information to fit the project.

It's not quite the brave new world I was expecting. It sorta looked like a mash-up of software like gdocs and a "to do list."

And Kendall was using email!

"I still use email but I'm able to track a higher volume of projects and workflows without commensurately increasing the volume of email," Kendall says.

Eich, the consultant from IDEO, sees lots of challenges. He says it's early days and there aren't any clear cut winners and losers yet. But he says, there's no turning back.

"Once you have had a workforce that’s complete grown up and immersed in digital technology, there not going to accept a tool kit from their employer that's so much worse than the thing that they experience in their personal lives," he says.

You know who he's talking about, right? Millennials.

References

Kim, Q. (April 17, 2014). The Dream Office of the Future: No Email! Retrieved on May 27, 2014 from Marketplace. Link to website: http://www.marketplace.org/topics/tech/dream-office-future-no-email

Why European Startups Shouldn't Fundraise in the Silicon Valley

“European startups are able to raise just a fraction of the capital at home compared to their U.S. counterparts. And they receive a lot more value from their investors. Why would I ever fundraise anywhere outside of Silicon Valley?”

I was not surprised to see quite a few such reactions to my recent blog post analyzing investment sizes and valuations in Europe. Looking at the numbers, the decision to fundraise in Silicon Valley for European startups seems pretty logical… at first glance.

However, I am going to argue the opposite. For most European startups at seed and Series A stage, fundraising in the US doesn’t make sense. Or worse, it can even kill the startup.

The art of self-promotion

A couple of stats from the US: Clinkle raised USD 25MM seed round on an app that hasn’t launched yet. GitHub raised USD 100 MM Series A round from Andreessen Horowitz.

Let’s compare the numbers with seed and Series A rounds in Europe: Trustev raises USD 3 MM in one of Europe’s largest seed rounds. GitHub’s investment is bigger than entire funds in Europe focusing on Series A. Looking at such data, no wonder European startups want to fundraise in the Silicon Valley.

One of the things that Silicon Valley is very good at is self-promotion. Every day Europeans open US-based tech blogs that discuss the next USD 10+ MM Series A, making it look like it is every day business in the Valley.

I love Nikhil Basu’s recent analysis of the Series A in the U.S., because it shows just how far off from reality such image is. Average size of Series A investment hovers around USD 6 MM, while the median is at USD 3 MM. That’s actually pretty close to the estimated size of rounds of even our “poor” CEE region that I mention in my analysis.

And one more stat from Tom Tunguz: just 20 percent of seed stage startups are able to raise a Series A in the US. It’s a rude awakening.

The message these numbers send to European entrepreneurs hoping to raise USD 8+ MM seed and Series A rounds if they move to Silicon Valley is clear: you are living in a dream.

The reasons for higher investment size

Some might argue that even a 1-2 MM difference is big enough to justify a US fundraising trip. Yes, it is most likely true that the average and median investment size in the US is somewhat higher. But there is an objective reason for why the US startups raise more than a European startup would: higher costs.

Scott Purcell of Jobspring Partners (recruitment agency focusing on technical employees with a strong presence in the Silicon Valley) mentioned that in 2013 the base salary of a senior engineer for a Series A+ startup was USD 165,000.

I must smile when I compare such figures to discussions I have with our Czech startups, some of which consider a USD 4k monthly salary for a Czech senior developer as very high.

It is such a shame that many European startups still wish to relocate to the US and thus give up one huge competitive advantage we have over the Silicon Valley: the lower salaries of technical employees that allow us to build a world class product for just a fraction of what it costs in the Valley.

If I compare differences in the average investment size (3-6MM in the U.S. vs. 1-3MM in CEE for Series A) with the average cost of a technical employee (USD 160k in the U.S. vs. USD 30-50k in the Czech Republic), I could argue that European investors are actually more generous than their US counterparts.

That’s because the average investment size might be twice as high in the US (median is even less than that), but the average cost of a technical employee (which tends to comprise the majority of the burn rate of an early stage startup) is three to five times higher.

Don’t take seed/Series A from a blue chip US fund

I meet quite a few entrepreneurs who decide to fundraise in the Silicon Valley despite being fully aware that the math is overwhelmingly against them. Why? They say it is because the Sand Hill Road titans, the famous venture capitals of the Silicon Valley, have experience and connections that cannot be matched by any European investor.

I can agree with that to a certain extent. But having seen the experience of such entrepreneurs coming back from their US fundraising trips, I cannot help but say: I don’t think it makes sense for most European startups to raise seed money, and in most cases even Series, A from blue chip US funds. I have three reasons to say that:

First of all, the fundraising process is longer and more expensive than founders expect, and in most cases the process doesn’t lead to an investment. Many European founders think that they will arrive in Silicon Valley and in a month or two come back with a check from Sequoia or Andreessen Horowitz. Encouraged by positive feedback after a 10-minute conversation with a junior person from a good fund during a networking event, the entrepreneurs think the check is right around the corner.

Three to six months later, they still don’t have a closed deal, because the fund is asking for more proof of concept defined as more traction, ideally in the US (a polite way of saying that the fund is not ready to invest).

How can a startup in seed/Series A stage survive without its CEO/co-founder who is halfway across the globe for three to six months? If such fundraising process doesn’t kill the startup entirely, it surely causes a massive defocus from what is really important: building an ass-kicking product and company.

Second, the blue chip funds very frequently require the team (or at least its part) to relocate to the US. They don’t have the time to travel for board or team meetings in Europe.

This often puts a lot of strain on the team, since it might have to split into two (part of the team staying in Europe and part moving). Further, the logistics of the relocation (visa, office, admin, etc.) take months to resolve, causing even further distractions.

The third reason is the saddest. Let’s say you somehow defeated the odds, managed to fundraise from a great Sand Hill Road investor, survived the relocation of your team, and are now ready for that famed investor to introduce you to a bunch of customers, give you regular feedback on product, and provide guidance on how to build a firm.

And then, nothing happens. You call your VC, and he tells you how busy he is and that he might be able to meet you in a week or two, if he actually picks up the phone. And then the math creeps up again: the fund manages USD 1+ Bn and has 100+ portfolio companies. The 10+ partners that manage the fund must split their time between all these companies and see a couple of potential investments per day.

How much time do you think they can allocate for a company they invested USD 3 MM, or 0.3 percent of their fund into? Especially if it is in the portfolio section next to GitHub or Clinkle?

When to go to Silicon Valley

Don’t get me wrong: there are European companies who raise from the US investors at the seed and Series A level and are very happy. But a lot of things have to go right.

I am a huge fan of the Silicon Valley investors and am convinced that they can add a tremendous amount of value to any European company. The key factor in getting the US fundraising right is timing.

I love to see our startups tweaking the product and proving the business model in Europe first, and thus maturing into the US expansion. They use part of the Series A investment to set up the US office, sign first customers there, and gently start flirting with the US investors.

Then, when the time is right, they raise the Series B and C from the Sand Hill Road investors who help them conquer the world.

By then, the investment is big enough for the US investors to be motivated to help the startup (even to travel to board meetings in Europe!), and for the European seed and Series A investors to be happy about their returns. And for the entrepreneur to be excited that he has conquered the Western world the mature way, one step at a time.

References

Kiska, A. (March 29, 2014). Why European Startups Shouldn't Fundraise in the Silicon Valley. Retrieved on May 21, 2014 from The Next Web. Link to website: http://thenextweb.com/entrepreneur/2014/03/29/european-startups-shouldnt-fundraise-silicon-valley/

Refining the Business Concept

Q1 2014

Q1 of 2014 has been memorable for our mentors working with some bright and driven entrepreneurs. While refining business concepts takes time, it is more about the development of the entrepreneurs, their attitude and mindset towards discovery that has been most exciting for the mentors. A successful business is not created overnight and we look forward to our continued work and collaboration with our entrepreneurs to see what the future brings.  

Successful Inaugural Session

Our Inaugural Application Session has Closed Successfully! 

We are pleased to state that our inaugural application session has closed successfully with great interest and enthusiasm by both entrepreneurs’ and mentors’. We are looking forward to working with these entrepreneurs in 2014 to develop their concepts further. Our next application session is in March and we are excited to see the future ideas that will be submitted. 

Our Inaugural Application Session

Our Inaugural Application Session is NOW OPEN! 

A group of international mentors have come together to assist entrepreneurs and small businesses to start and grow their companies. These mentors are volunteering their time to groups with interesting and promising proposals. Feel free to apply today and good luck in the application process.