Top 10 Startup Financing Takeaways from Investors Michelle Goldberg and Andy Sack

First of all, the terms “downturn” and “recession” don’t do justice to the current climate, says early-stage tech investor Andy Sack. As he puts it, “This is the seminal event of our lifetimes. This is our World War II. I guarantee I’ll be talking to my grandchildren about the Depression of 2009-10: ‘Make sure you save.'”

Sack was speaking at the MIT Enterprise Forum Venture Lab event in downtown Seattle last night. He was joined by Michelle Jacobson Goldberg, a partner at Bellevue, WA-based Ignition Partners who is on the board of Mpire (maker of Widgetbucks), Visible Technologies, and SEOmoz. The room was packed with scores of entrepreneurs looking for financing advice. “It’s ugly out there, and raising money has never been f-ing harder,” Sack told them.

What’s interesting is that both Ignition and Founder’s Co-op, Sack’s seed-stage fund with Chris DeVore, have made investments in the past 90 days. Founder’s Co-op has made bets on Frugal Mechanic; LookStat, an analytics and workflow-automation startup focused on the microstock photography industry (this was news to me); and a new smartphone company that hasn’t been announced yet. Meanwhile, Ignition announced earlier this week that it has led a $10 million investment in Silicon Valley-based Zenprise, a mobile-management software firm.

Goldberg and Sack spoke for about an hour on their perspective as investors, what startups need to know to get funded these days, and what the hot (and not so hot) areas of investment are. Here’s my top 10 list of takeaways:

10. Valuations are way down. “Anything that’s early, if you used to raise $3 million, you might raise $1 million now,” Sack says. And count on a similar calculation for the valuation, he adds.

9. Investors are seeing more pitches than ever. “There’s been an incredible amount of deal flow,” Goldberg says. To which Sack adds, “Deals are getting done, but more slowly and with a higher bar…Deals getting done really have to resonate with a customer base.”

8. Your next financing is your last. “Everyone wants to see your break-even plan,” says Sack. “Financing risk is higher than technology risk.” And Goldberg adds, “Take the money you can get, but make sure your investor really understands what progress you will make.”

7. With exit markets closed, VCs are opportunistic. “VCs are in triage mode,” says Goldberg. “Spending more time with your companies means less bandwidth for new opportunities and new companies. People are in less of a hurry, they’ll take more time to see how products are resonating and whether companies are making progress or not. But it is a time to look for great investments too.”

6. More than ever, it’s who you know. “People are investing in people they know, and who they’ve known for a while,” Sack says. Goldberg echoes that, saying, “Every single deal we’ve done is with people we know, and know well. We’re not going cold with entrepreneurs who walk in and have a great idea.”

5. Get money from customers, not investors. “It’s easier than raising money today,” says Sack. “If you can get money from customers, you should.” Especially for first-time entrepreneurs, he says.

4. Think about exit potential. “Is the market moving in such a way that you’ll be a strategic pickup?” Sack asks. Also, be prepared to be patient, he says. “The time to get to some kind of happy-place end game is longer. It’s doubled or more.”

3. What’s hot. Sack points to health care (“cleaning up that chaos and solving some pain points is pretty interesting”), banking and real estate (e.g., helping consumers with foreclosures), mobile (“great growth space, hard to make a lot of money”), and entertainment. Goldberg cites “software that helps people save money without a lot of upfront costs.” For example, she says, “We’re bullish in looking at investments in cloud computing and virtualization.”

2. What’s not. Software innovation in most big companies, says Goldberg—“they’re not spending the money.” And according to Sack, “Consumer plays are out now. Consumers don’t have any money.” As for Web 2.0, he says, “There’s going to be a great washout of Web 2.0 investments. There’ll be a lot of carnage. There’s a home for sure for Twitter, but how that thing makes money, I don’t know. There’ll be a lot of movement in that space as companies go for Series B or C.” Goldberg adds, “If I knew how to make Facebook profitable, I wouldn’t be standing here. It’s a tough business model…If Facebook can’t do it, how is a startup supposed to do it?”

1. Seattle will survive. “A lot of VC funds raised money in the last year or two,” Goldberg says. “In general, there are pots of angel money, and strong angel communities in Seattle that have raised their own funds. Companies like Microsoft and Amazon are well funded, they’re going to make it through this, and they attract talent and wealth to the community. We’re a smaller community than Silicon Valley, so we are dependent on the pillars we have here to keep innovating. Amazon is innovating. Microsoft will innovate in the next couple years. Things will be built, and things will happen here. But I don’t have a crystal ball.”

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7 responses to “Top 10 Startup Financing Takeaways from Investors Michelle Goldberg and Andy Sack”

  1. Ignition, Ignition says:

    Goldberg was quoted as saying ““Every single deal we’ve done is with people we know, and know well. We’re not going cold with entrepreneurs who walk in and have a great idea.”…

    Hmm… to quote a particularly sagacious movie character “…and that is why you fail.” :-)

  2. She Really Hasn't a Clue says:

    Did Goldberg really say that “If Facebook can’t do it, how is a startup supposed to do it?” Whereas VCs used to ask startups “What’s to stop Microsoft from competing and beating you?” it’s now “If Facebook hasn’t, you can’t”? How asinine.

    I was kinda neutral on Ignition for a while, willing to let them prove themselves this kind of opinion really makes me think that Seattle VCs really have no freakin’ clue. She doesn’t even have any direct operational or entrepreneurial experience anyways.

  3. I think Michelle Goldberg meant ‘every single deal’ they’ve done in the past few months—not ever. As for Facebook, it’s certainly a valid question how to monetize Web 2.0 sites. She didn’t say a startup couldn’t figure it out, just that it’s a big challenge.

  4. Ian says:

    Contrast Michelle’s/Ignition’s view that “We’re not going cold with entrepreneurs who walk in and have a great idea” versus Paul Graham/Y Combinator’s approach which embraces this, and then compare their respective track records even given Y Combinator got started much later than Ignition, and it’s clear Ignition is lost.

    I actually want Ignition to do well, and the Pacific Northwest needs them to do well. But their exceeding arrogance without any home-runs to prove their proposed model shows they are just plain poor VCs.

  5. vicky says:

    Michelle For the record facebook was making money last year and this year i.e 2010 made close to 800 million.