As the market continues to recover from the 2008 dive and subsequent fallout, many investors are understandably jittery about throwing money at early-stage companies and have instead opted to join less risky rounds for more mature startups.
But for young startups with solid Web products, there's a silver lining: Statistics are showing slightly better numbers for seed and early-stage deals at Web startups than for startups in other verticals.
Have a killer product
Product is still the most important consideration when you're trying to raise capital.
Being the original is trumped by being the best, and sometimes — just sometimes — having an intriguing product is better than making money right out of the gate. One of social media's biggest startup success stories in recent years is Twitter, which without a doubt has turned out to be a killer product, one that the Twitter team focused on to the exclusion of almost every other business consideration, including revenue.
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Most importantly, having a killer product is one of the few things that will help you raise money in the face of stiff and ever-increasing competition. In the current tech ecosystem, a clone is born every minute, but fighting off your competitors won't help you as much as looking inward and building the absolute best product you can.
- TweetPhoto's Series A: This startup had competitors in spades — and popular, well-entrenched ones, too. But that didn't detract from its focus. When I spoke with the founders at Chirp, creators of TweetPhoto, they displayed single-minded confidence in their product; they believed that what they were building was better than anything else on the market. And they were able to convince investors that this was the case, as well.
- Foursquare's Series B: Foursquare's core offering — a mobile check-in application — has seen iteration after iteration over the past year or so. As a result, the application has gone from being a spin-off, nerd-centric game to a potentially scalable location and marketing application.
- Collecta's Series B: The folks on this team were facing some serious competition last year, and not just in the company's vertical of real-time Web search. When Google and Microsoft simultaneously announced they'd be entering the real-time search market, the startups on that scene were definitely shaken. But Collecta focused on creating more value, more relevant results and a better algorithm, and investors rewarded that dedication.
Have a killer team
Quora, Brizzly, SimpleGeo and Square have all gotten funding over the past year, and it would be fatuous to think that their founders' backgrounds at Facebook, Google, Digg and Twitter had nothing to do with those deals. We suspect that the access to high-quality networks of investors, which generally comes along with working at one of the larger tech companies, helps in securing funding. But also, having been an important part of a world-famous and innovative team proves a lot to would-be investors. And look at Internet phenom Ze Frank; the meme master got $500,000 in seed money for his stealth social gaming startup.
But a "killer team" doesn't necessarily mean all-star tech pedigrees and Internet fame. Investors are looking for, to put it plainly, good people who are intelligent in their disciplines and flexible in how they see the product.
As VC Sumeet Jain of CMEA Capital wrote to us, "If we can't think of a better team, we're excited … Seed and Series A companies can pivot several times, and the company at the end of several years of development can be radically different than what was first envisioned. The bet, therefore, has to be on the team to a much greater degree than any one idea or business."
- SimpleGeo's Series A: Matt Galligan was the boy genius behind SocialThing, a product of the TechStars program and an AOL acquisition in its early stages. Joe Stump was the chief architect of Digg. When Galligan told us last year that they were working together on a social, location-based startup, his passion for the project was on par with his team's expertise. Funding a team like that was a safe bet.
- Quora's Series A: Facebook's engineers are reportedly some of the best in Silicon Valley. So when a few of Facebook's early hires — including the company's CTO, Adam D'Angelo —bolted to start something new, investors were certain that whatever came out of the company would be scalable and beautifully coded.
- Square's $10M Series A: It's true that investors love apps dealing with shopping and finance, but what jump-started Square's success early on was the big-name appeal of its CEO, Jack Dorsey. As a Twitter co-founder, Dorsey carried that most elusive of Silicon Valley trophies: mass adoption. Dorsey's cachet undoubtedly helped Square secure its atypically large Series A.
Have a killer business model and revenue opportunities
While we've seen a few examples of new apps getting funded as the founders steadfastly refuse to focus on revenue during formative product-development stages, we're seeing many more deals being made around apps that show solid, money-making potential out of the gate.
The technology market may boom and bust, the global financial market may crash and recover, but VCs will never get tired of companies that can make money.
Even if the tech world is full of bigger competitors than your company, your startup still has a chance at raising money (and at longer-term success) when there's a proven revenue model and enough customers, users and revenue to go around.
- Shopkick's $15M Series B: Shopping and location apps are among the hottest for investors right now, and it's easy to see why. They connect to a direct revenue pipeline (advertising dollars for marketing campaigns and, depending on how the app is executed, user dollars for special features) and a huge amount of pursuant data on how, where and when people spend money. Shopkick is capitalizing on both trends at once and is primed to snag consumer and brand attention and cash.
- Blip.tv's $10M Series C: Blip.tv did revenue the old-fashioned way: It asked users to pay for their service. And although YouTube, which has chronically struggled to turn a profit, has proved to be the Goliath of the online video world, Blip.tv and a handful of scrappy video startups have fared well through offering clever partnerships and freemium benefits.
- LivingSocial's Series C: LivingSocial is competing with Groupon, the large and fairly well-known bargain-hunters' app. But when it comes to this market and this economy, there's enough room for more than a few smart-shopping sites and applications. By linking their product directly to consumers' buying habits and creating a built-in opportunity to partner with large brands and small local businesses alike, LivingSocial crafted an attractive investment opportunity.