I won’t cover the whole event since you can see the whole day webcast here as well as read about each session’s summary individually on Techcrunch.

Super Angels vs. VCs
The disruptive fireworks started early with the Super Angels vs. VCs panel that was very anticipated for anyone who had been following the AngelGate controversy that Arrington started with a blog post earlier in the week on Techcrunch that alleged there was a conspiracy of Silicon Valley angel investors who were looking to collude and do various nefarious things. This led to a public denial from Dave McClure who was on the panel, along with “private” emails from Ron Conway and Chris Sacca getting leaked on Techcrunch as well.

Arrington prefaced the whole Techcrunch event with a blog post that discussed how this specific panel and the whole event would not be about AngelGate, but then proceeded to ask his first question about it and made a few jokes that actually started the whole panel off on a somewhat hostile and uncomfortable foot.

The panel didn’t get much smoother from there due to there being too many panelists (7) and various panelists cutting each other off. Arrington also was fairly aggressive in changing topics, cutting people off, and jumping around. It was entertaining, but I’m not sure anyone learned anything from the panel except that there are still some hostilities to be worked out among those involved.

Peter Thiel
One enjoyable session to me was Clarium Capital and early Facebook investor Peter Thiel’s fireside chat. Thiel is a known contrarian, which made for an interesting discussion to see how he’s currently seeing things differently from the rest of the silicon valley.

His most notable comment of the day was that he thinks Facebook is relatively undervalued at $30B (see my recent post about Facebook’s valuation), and that he would be long Facebook over Google if given the choice. As an investor he benefits greatly if this occurs so he’s obviously biased, but it’s interesting for him to say it so publicly.

Another comment that stuck with me was Thiel talking about how many companies in Silicon Valley are just building iterative products that really only serve the early adopters living in Silicon Valley. We have a recession/depression occurring throughout the country and people are building products in a bubble for the technology elite. He said if you drive 30 miles out of Silicon Valley people don’t care about most of the products people are building. As someone who lives outside of Silicon Valley, I can relate to that. There’s not too many people in Eugene, OR using a lot of the newer iPhone applications for example. Thiel was really trying to remind all the entrepreneurs in the audience to try and change the world with their companies instead of just building a “me too” product.

Startup Battlefield
The next set of disruptions came in the Startup Battlefield which was three sessions filled with companies demoing for 15 minutes to the audience and a rotating panel of judges that mostly consisted of well-known investors. The disruptions were not so much from these companies though, but the fact that almost every demo had awkward pauses as there were almost always troubles switching between screens for the video portions of presentations. It really killed the flow of many of the presentations. If someone wants to build a truly disruptive technology, design conference presentation equipment that works.

The general feeling I got from all the presentations is that there is a whole batch of new companies that are focusing on check-ins to different things, gamification, and rewards. Most of the startups were heavily focused on these, and it became to get repetitive to the audiences and the judges.

I have to give the companies credit though, it’s not easy to stand in front of a smart panel of judges and a very smart audience and do a presentation of your new product and then get questioned and criticized by the judges and the press in attendance.

I won’t go through every company, but here’s some quick thoughts on a few of them:

• Qwiki – This company led off the first session and a had a very impressive presentation. It was polished, had humor, and showed off their product well. It basically builds an interesting visual presentation that mixes pictures, videos, data graphs, and audio on any subject. One judge called it “search with a voice” which they took offense to, but it was definitely very cool. Gina Biachini did ask what the use case for this was, and I find myself also wondering if this cool product ever will get used by a large amount of users, but one of the best demos and it was cool technology.
• Storify – An interesting product that lets you quickly add tweets, youtube videos, flickr pictures, and other pieces of social media together to create a “story”. They presented this a bit as a journalist tool, but I think that was the wrong approach. It seems more to be something useful for WordPress bloggers and social media junkies.
• Gifi – There seemed to be some positive buzz out there on Gifi, which was a product built internally at payments company Venmo as an example of their API. Taken in that context, it’s a very nice use of their API. The concept of leaving money for your friends in different spots they can check in is very cool in theory. However, I don’t see this getting that much traction. When you realize that the number of people out there actively checking-in to places is still quite small (although growing), and then you see how many of them actually want to leave money for friends and will remember to do so, I think that number is pretty low.
• Badgeville – A startup positioned to take advantage of the growing game dynamics on the web, Badgeville is a service that publishers pay for to add what’s essentially somewhat custom game dynamics to their site. Users get points, badges, and rewards for doing things like reading a story, tweeting a story, etc. It was nice that the publisher had a lot of control over what their game is like. I agreed with Joe Kraus when he was judging this though that it feels like this space may get overcrowded and people may get tired of game dynamics. Or, we’ll see a couple of clear winners that come out of this space but that it’s hard to tell who that might be. They also are already generating healthy revenue from selling this service to publishers. Always nice to have good revenue in a very young startup.
• OneTrueFan – Built by members of the MyBlogLog team, OneTrueFan takes some of those features and also combines it with game dynamics to have a competition among website visitors to become the “one true fan” of a website. The idea is similar to being the mayor of a place in Foursqure, except there are more things that help make you a one true fan such as reading an article, sharing an article, commenting on an article, and more.
• CloudFlare – Usually when I see the word “Cloud” in a company’s description my eyes glaze over and I wander off. However, CloudFlare’s founder was very energetic in a controlled way and did a really nice job showing the value propositions of the service. It provides a lot of the benefit of having your site hosted on a cloud as far as speed and reliability combined with added security and analytics. There’s a good free option as well as paid options for more advanced features. I set this blog up on it in under 5 minutes and was really impressed with the signup process and the obvious usefulness. This may was my top startup of the group.

Techcrunch Being Sold to AOL?
The last disruption of the day was the story Om Malik published that sources were saying AOL is on the verge of buying Techcrunch. Obviously this was a tad distracting, as Mike Arrington was absent from his own conference for the 2nd half of the day.

We’ll see what happens on Day 2, could be big news?

Drop by the booth and say hello, and yes, I am also wondering how awkward the opening reception Pajama Party at the Hard Rock will be with a bunch of bloggers in their pajamas.

I think it will be educational, great for beginners, but also provide some nuggets of wisdom that even experts will benefit from.

If you’re interested in this panel idea, please go vote for it by giving it a star rating. Note: You do need to sign up for a free account to register, they promise to not spam you.

The top metric that most people are looking at is increasing their conversion rate. So how do we increase conversion rate?

1. Segment, segment, segment.
Avinash wisely pointed out that looking at a site’sA overall total conversion rate is not that easy to take action on. By using web analytics you can segment conversion rate into all kinds of groups. You can segment by referral source, segment by landing page, segment by search terms, etc. Working then to improve the conversion rate of these segments is easier to monitor and improve.

2. Conversion rate needs friends
Don’t look at conversion rate in isolation. Look at average order size, visitors, bounce rates, and other metrics in conjuction with your testing on conversion rate.

3. Don’t look at conversion rate in isolation
Similar to the above two points, you need to put context around conversion rate numbers. For example, by offering your product for half price you’ll most likely increase your conversion rate. That’s great right? Well, no, because you’re making less revenue.

4. Fall in love with abandonment
Abandonment is the only way people can leave your site and hurt your conversion rate, so naturally improving the abandonment rate on each page of your website will help your conversion rate.

5. Determine the true opportunity
It’s impossible to actually convert everyone. Part of your audience is going to be landing on your site by mistake, some of the users are just crud and will never be customers, but what real opportunity can you get? You need a good idea of your true audience to go after it.

So what is the golden answer to all this? Testing.

Avinash said people far too often use the HiPPO strategy on their web decisions. HiPPO stands for “Highest Paid Person’s Opinion”. The HiPPO for your website is just one opinion, no matter how smart they are. You need to test to let the real users decide what works best. 80% of the time the HiPPO (or you) are wrong about what’s going to work best on your site. And you must continue testing, what’s great today, is stale tomorrow.

What methodologies can you use to test?

Methodology #1: A/B Testing
Hopefully most of you are familiar with A/B testing, and Avinash outlined the pros and cons of this strategy, but said if you’re doing no testing today then you should start with A/B testing immediately. He gave a great example of how when he was at Intuit they tried out this amazing and sexy Flash shopping cart solution. Avinash thought it was great, it kept users from having to refresh pages, it was slick, it was easy to use, and he saw no way it could fail. In an A/B test with Intuit’s old normal shopping cart, it failed miserably. Why? Users apparently were used to the old normal way.

Essentially, A/B testing is simple, easy to do yourself, but it’s limited and you have to keep it simple to be accurate.

Methodology #2: Multivariate Testing
Multivariate testing is a testing format that allows you to test multiple parts of your page at once. It allows you to test alot, most tools provide great additional tracking, you can visual results pretty well, but it’s more complicated. Avinash gave an example of how multivariate testing improved the downloads of Picasa on Google’s Picasa download page by 30%.

The prime tools in multivariate which all have different strengths:

• Offermatica – The most marketing focused.
• Optimost – More technically focused.
• Sitespect – Don’t need to implement javascript code, they do it by packet sniffing between the server and user.
• Google Website Optimizer – The only free tool, but have to be using Adwords.

Methodology #3: Experience Testing
This is the art of testing sets of multiple pages independently. Such as funneling Windows users vs. Mac users. There are no current tools that do this, so you have to be sophisticated and do this yourself. However, this has the most power and can lead to the biggest results.

A great talk overall, and Avinash was fun and engaging while he spoke. I think he has a bright future as an analytics evangelist.

• Email/communications
• Media business so we package and program content
• Search business
• We tie it together through the front door of Yahoo.

  Then the following is a paraphrased version of the discussion between Jeff Weiner and John Battelle.
  
  John: Yahoo! reported earnings yesterday and Wall St. yawned. The statements from Terry Semel that Panama is doing well in January raised expectations and then you didn’t blow away expectations. Compared to the Google earnings which they seem to knock out of the park, why does it feel like they are running circles around you?

  Jeff: We ended up in the middle of the range provided by Terry and Sue, so we’re extremely happy with the results of Panama so far and they will get better each quarter. We’re executing and we’re on the right path.

  John: What about Google? Why am I compelled to ask them about you? You have the biggest network on the web, but everyone focuses their attention on Google?

  Jeff: They’ve had a great run over the past 3-4 years, and Yahoo has had some slip-ups. But we’re building for the long term to be around in 11-12 years. We’ve had some nice attention recently with Panama, Yahoo! Pipes, and our deal with the newspaper consortium.

  John: Do you think there is a distinction in approach between the way Google and Yahoo view the rights of content holders?

  Jeff: I don’t know if there is a distinction, but we do value the rights of intellectual property holders. We’re building the largest video network with NBC, Universal, Comcast, Myspace, etc. And our recent relationship that was announced with Viacom is another example of media companies wanting to work with us.

  John: Isn’t there a big game of Stratego going on here? Are people working with you because they don’t want to work with Google?

  Jeff: I don’t think it’s because of Google, I think we provide value that others don’t. We work with media companies well and package content better than anyone. There is a reason we’re #1 in News, #1 in Music, #2 in Sports, and back to #1 in Finance after being out of that spot the last couple of years.

  John: Two acquisitions you guys have been rumored to be involved in recently, the Doubleclick acquisition by Google and the Facebook acquisition. What can you tell us?

  Jeff: I can’t comment on specifics, but the Doubleclick deal is no surprise. There is a trend that the largest providers of advertising services want to be full-service shops. The Doubleclick acquisition, AOL buying Advertising.com a couple of years ago, etc. We were the leader in display, and we went out and bought Overture a few years ago to get performance. In regards to Facebook I think it’s a great site that is continuing to execute and needs to continue to execute.

  John: Is there pressure to make a big acquisition?

  Jeff: There is no pressure, but we’re open to acquisitions where they make sense. We’ve got to get together our social assets. We don’t have something like Myspace or Facebook yet.

  John: You say yet, so are you building this? You had Yahoo360 and that didn’t take off.

  Jeff: We have great raw assets. Yahoo Groups, Yahoo Answers reaches 90 million uniques, delicious, Flickr, Jumpcut, and Bix. We have lots of great assets and we need to put them all together.

  John: Isn’t that your job? To put them together? No pressure, right? Anyway, I need to get to one last fun question. Microsoft.

  Everyone laughs.

  John: What’s your opinion on Microsoft, this formerly great company who has not seemed to find the internet magic. They decided to go their own way and build their own search instead of working with you guys like they were. What should they have done over the last couple of years?

  Jeff: You can never count out Microsoft. They are still very powerful.

  John: You can imagine they were not pleased in losing the Doubleclick deal. They had 3.1 billion, so something else must have happened.

  Jeff: It’s a very intense competitive landscape. Much like a chess board as you mentioned earlier.

  John: Are you and Microsoft going to merge?

  Jeff: No plans that I know of. I would’ve liked to have seen that relationship with Microsoft stay together. We’re always open to partnerships as we’ve done recently with Viacom, ebay, the newspaper consortium, and others.

  John: Thanks for your time Jeff.

John Battelle – FM Publishing (moderator)
Mena Trott – Six Apart
Jay Adelson – Digg
Joe Kraus – Jotspot/Google

The following is a paraphrasing of the conversation, so don’t quote me on it.

John: Joe and I play poker, he’s going to Las Vegas this weekend. Joe founded Excite and rode it through the boom and bust, and then founded Jotspot and sold that to Google recently. Mena and Six Apart came to a point to decide whether it was built to last, or built to sell. And Jay, Digg was on the cover of Businessweek, acquirers came calling, but it didn’t happen.

John: What does built to last mean to all of you?

Joe: Entrepreneurs have to decide between success and control. It can really focus where you go. Are you building a company for the long term, or just a product to sell to another company? Funding is another question. If you’re built to sell, you actually want to take less money. The more money you take the harder it is to sell at a good return.

Mena – All those things Joe said have entered our minds. Control was something I was willing to give up because I knew I couldn’t get the company to the point I wanted without help. We’ve always felt we had control over the years, although we’ve given up a lot of control to others with titles and such.

Jay – Digg was something that was born of a passion with a specific goal. A lot of the ideas you come along are components of business models. We clearly went at it with profitability in mind. Digg’s experience has always been that focus. Although even if you do get to profit, aren’t you a better target in the long run?

John: I should disclose that my company FM represents Digg, Six Apart, and we all partner with Google. We couldn’t find a panel that fit this subject where that wasn’t the case.

John: How much pressure is there to sell? When you want to focus on building a profitable business, are there are a lot of pressures from employees and others to sell?

Joe: With Jotspot I felt like I had convinced 28 people to leave their jobs and opportunities to follow me. So there was pressure to me to get these people a good return on their time and efforts. From the VC point of view, most of the VCs don’t want to sell. The entrepreneur has 100% of their equity in one company, but for a VC you’re just a part of their portfolio. They expect most companies to fail and make their money from the big successes. So selling early on the VCs don’t want to sell because they don’t want make 5x, they want to make 100x. The entrepreneur wants to sell to make sure their 100% equity gets positive, so there is tension there.

John: Mena, selling for 50M is rare air, selling for 100M is even rarer air, and selling for YouTube money is even more rare. Do you feel a pressure or distraction?

Mena: I guess a little distraction, but we’ve been around for 6-7 years, and it’s a different acquisition market all the time. We don’t think about being the next YouTube, we think about achieving our company goals. We have 140 people, it’s not something easy to sell. We care about all those people so it’s complicated. It doesn’t interfere to our day to day work.

John: There was a period of distraction last fall right Jay?

Jay: Sure, with Digg last fall the buzz really hit. The Businessweek cover created a lot of calls, big media companies wanted to sniff around. They say they want to overpay, but you don’t know. We came up with a policy that we were going to execute, but the crazy numbers started to pop up and you start to think that you can give them a day or two to discuss it with us. That ends up taking a lot of time. It becomes a real distraction, and you have to bring everyone back to reality about this is who you are, and unless you really think that the acquiring company is going to execute it better than you are, we have to keep executing.

John: Do you guys have a perfect company in mind to acquire you?

Joe: With Google it was the right one because it’s a nerd paradise and I’m a nerd who had 28 other nerds working with him. Entrepreneurs are optimists, and so there are a lot of optimists in Silicon Valley. But Google was just really the right one at the right time for us. I think when I was operating I didn’t think about who the perfect partner would be. I knew what return we needed to hit for our investors and partners so there are companies that can hit that range.

Mena: I can tell you I have a list of who I wouldn’t want to be acquired by. Not so much on who I’d like.

Jay: You have to forget about the YouTube thing, and just focus on reality and what you can do.

Mena: There is a lot of pressure from family. We get newspaper clippings from our family asking when the big deal is going to happen to us?

Jay: It also really matters who you’re working with and owned by. If Digg was owned by the wrong company, it would really put into question the fairness in our algorithm.

Mena: Yes, we have the ability to partner with anyone as an independent company which makes our product better.

John: Is the Web 2.0 golden era over? Do you have to build bigger companies now to succeed?

Mena: We have a bunch of people because we have four product units which really spreads you out. I don’t know if the golden era is over, but we can’t really go back.

John: How many open jobs do you have at Digg?

Jay: Probably about 10, which will get us to 35. I’ve often been wrong about what it takes to get stuff done. I can see so many different things we can do, focusing on other categories, going international with news, etc.

John: When you joined Google did the number of employees on your project change?

Joe: It didn’t change, our non-engineers went to sales and marketing, and our core engineering group stayed together.

John: What are you going to do there?

Joe: Avoids question….tGoogle has a lot going in the in the Web office space and that Jotspot fits into those goals.

Michael Eisenberg – Benchmark Capital
The overall Benchmark Capital funds manage a few billion dollars, with offices all over the world. Michael is based in Israel. They’ve Invested in ebay, Second Life, Metacafe, bebo, and Yelp.

David Kornik – August Capital
He’s the father of VC blogging with his blog Ventureblog.com.
August runs a 350M fund. They’ve invested in Six Apart, VideoEgg, and Technorati.

Josh Kopelman – First Round Capital
$50 million fund, with primariliy first seed round investments in the $250k-$500k range.
They’ve invested in StumbleUpon, del.icio.us, VideoEgg, Gigya, and Aggregate Knowledge.

Chris Moore – Redpoint Ventures
400M fund, invests in consumer internet. Invested in Ask Jeeves, Excite, Netflix, and Tivo in 1.0 phase. 3-4 years ago refocused to Myspace, Gaia, Buzznet, Right Media, Efficient Frontier, and Leadpoint.

The following is a paraphrasing off the conversation.

Arrington: When you invest small amounts, do you require a board seat? What’s the average first round size?

Dave: In almost every case we end up sitting on the board. It’s more about if it’s an opportunity to build a big business. Just because we have a big fund doesn’t mean we have to invest a ton of money to get involved.

Josh: We average about 350k over the past few years, we participate in later rounds as well.

Jeff: 200k to 1.5M. We act a little like angels.

Arrington: This isn’t going where I wanted it to. I wanted to pit Josh and Jeff against the big guys, so I’ll just force the conclusion I wanted. I was hoping to get at my thought that it’s harder on the big guys now because earlier investors like Josh and Jeff are getting into the best deals first and getting big chunks of the company and then you guys have to really compete later on to get in on the investment.

Jeff: We have participated with the big guys on lots of our deals.

Arrington: Again, the facts aren’t helping me.

Michael: Why would Techcrunch allow the facts to get in the way of a good story?

Arrington: Whatever your next startup is, it sucks.

Jeff: Hold on let me Twitter this!

There were quite a few laughs at this point, and everyone is having a good time giving Arrington a hard time about Techcrunch.

Arrington: When Joe Kraus built Excite years ago he needed to raise a lot of money. Now he raised a very tiny angel investment and got Jotspot started, then took a little more money later on when he needed to scale. What if there is no later round where you bigger guys get in?

Dave: If you make a lot of money off of very small initial investments, it’s fine! We’re paid on successful outcomes.

Arrington: So, if your fund is 350 million, and you have 5 partners, you make a certain amount of money from your management fees. But if you don’t invest all of that big fund, you will have less money under management and make less in management fees.

Dave: It’s not so much about how much we’re managing, it’s more about investing the right amount in companies that end up doing well.

Josh: My first company took 5 million to get a product shipped, second company took 2.5 million, my third took 750k. Now I’m funding companies for a couple hundred K. Now that doesn’t get to scale, you’ll still need more money down the road.

Chris: Mike, your theory has a point. If you’re looking at that $50M sale to Yahoo or Google, you can get there with less money. If you’re looking at the really big ones like YouTube and Myspace, you need more money to get there. The bigger funds have to be more careful and select the ones that can get big.

Arrington: Brand name angels are Josh and Jeff, if they want to invest people take it. The big funds have tons of competition for deals, Geni had a crazy valuation. What do you do?

Dave: Haven’t you heard of Value Add?

Arrington: Do you agree you’re getting squeezed from both ends? You have Jeff and Josh at one end and more competition from deals, on the other end the IPO window is shut.

Arrington: Jeff, I know the return on your portfolio because we’re friends. And it’s amazing. Josh I can guess at yours and it’s also going to be good. It’s natural for you guys to say everything is fine. Chris, are you agreeing with me?

Chris: Yes, it’s hyper-competitive, it’s cyclical. We’re not going to do crazy deals, but you have to just hustle to find the right deals and make relationships with the right people who can make these ideas happen.

Jeff: We have no clue how these things are going to turn out. Of 20 companies, I have a 50-75% kill expectation. So 10-14 companies should fail. I’ve sold three and none have died, but we’ll see in 5-7 years.

Michael – It’s incredibly cyclical. Everyone gets bubbly when the exits happen. You can make the most money when the exits aren’t occurring.

Jeff: It’s also hard now to find the quality workers.

Michael: Google is talked about as the key acquirer, but they are also driving up the cost of engineering everywhere.

Arrington: True, but there are a lot of key people leaving Google that are fully vested and are either for hire or will be starting new companies. That’s exciting.

Audience: What competitive advantages are any of you building to differentiate? Incubators?

Dave: Incubators have failed before, and they continue to fail. We’re investing in a set of people coming together to build a business. The incubator model shares resources, so when the companies want to build out and scale they lose those resources right back again.

Arrington: So besides the fact you hate Incubators, is there anything to do?

Dave: We definitely share information across portfolio companies to try and help them solve common problems.

Josh: We have CEO meetings as well as an e-mail list to handle things like how do you find a good recruiter, what sort of options package do people get, and other common issues.

It then moved on to some random audience questions and ended up as a very laugh-filled session.

Rob started up by asking how many people in the room had started a company in the last 5 years, and about 80% of people raised their hands. He then asked how many people would be starting one soon, and I think teh other 20% raised their hands.

Rob and Jeff then went over their companies portfolios, and they were impressive lists of some of Web 2.0′s biggest success stories and companies that look to be future successes.

They then moved into the “Ten Points”:

• The Idea
• The Team
• The Company
• The First Money
• The Pitch
• The VC Process
• The Funding Process
• The End of the Beginning
• The Growth
• The Exit

The Idea

VALUE
Rob: What value are you creating? There are “can dos” and “should dos”. There’s a lot of stuff that can be done, but should it be?

Jeff: There are often changes from the early stages in the idea, but the value has to be there.

MARKET
Jeff: At the end of the day what market are you going to serve. Why will they care? Then we can figure out how narrow or broad that market should be. You can go for a lot of users where you try and get a few cents from each user, or go narrow and try and get a lot of value out of each user.

Rob: You need to think through if you’re creating a new market or serving an existing market. It’s harder to create a new market, but it can be more valuable if you can do it.

Jeff: In a time where it’s so easy to build features and enhancements, if you’re going to do something that’s already been done, you need to be 100% better, not just 10% or 20% better.

ADOPTION
Rob: You need to go after scale and speed. Different kinds of money will be interested in different growth rates.

FAILURE
Rob: Failure cheap and fail fast. The quicker you can get to the point to figure out if it’s going to fail or not is the best. You can move on to the next thing while burning less cash in the process. We often like to invest in experienced entrepreneurs. Investing in a first-time entrepreneur can be like paying tuition.

Jeff: You learn more from failure than success. You can still believe in your idea, but the money is going to need to know when they should get out.

The Team
Rob: You need to gain our confidence that we can believe in you and your team. At the end of the day we’re betting on you.

Jeff: We will be your friend, but we’ll also kick your ass. One big question I get a lot is how to bring in the right people for positions. How do I find a CTO? How do I find a great salesperson? We can help as a VC, but you also really need to get out there and network and find people.

Jeff: Question from the audience about how you start finding people while protecting your idea. Basically, you can try to get people to sign NDAs, but in the real world that doesn’t work. As an investor I never sign them. You can do background checking to see what their reputation is like, but if your idea needs that protection it’s basically too easy to copy.

Rob: There isn’t much secrecy anymore. I’ve been involved in companies that we tried to keep quiet but people would come up to me and say they heard I invested in such and such company, when I didn’t even think they should know about it yet. Secrets just don’t say that secret now.

Jeff: The idea of the unique idea is not really true. The “rule of 3″ is good. If you see one company working on something, it means three really are. If you see three companies working on something, than nine really are.

The Company

STRUCTURE
Rob: A great gut check is when you have to go through the trouble and cost to incorporate your company. Paying a few thousand dollars and doing the paperwork is a good early gut check if your idea is good and if you’re serious about it.

Jeff: Make sure you setup properly, get it legally protected and setting up in the standard format is important. A venture capitalist wanst to invest in a C corporation incorporated in Delaware. Use a real lawyer instead of one of those $500 services. They just send you the paperwork and you’ll have to pay $50k to fix the problems later.

FOUNDER EQUITY SPLIT
Jeff: How do you split up founder equity? The debates about how to split up equity need to happen and should happen early. Is it evenly split? Does the tech guy get the majority because he built the idea? Does the business leader get the majority because they will lead and be the CEO in the future?

Rob: From our point of view, the risk and dynamics are best with a fewer number of founders. We like two founders better than eight.

Jeff: At the same time, single founder companies make me nervous. It’s a lot of stress and it can be lonely to make decisions. My favorite is two people, one tech person and one business person is a nice mix.

Jeff; Audience question if there’s been any trends in how equity is split. There are no particular trends, I just like it explained to me why it is what it is.

Rob: There’s definitely a 50/50 pattern in two-person companies.

Rob: Does location of the founders matter in an investment? It can, but it’s just a factor. It usually doesn’t make or break a decision, but it’s considered.

Jeff: I like to have the founders within an hour’s drive. It makes it much easier to meet that way.

MAIN VS SIDE JOB
Rob: I get a lot of people who want funding so they can quit their day job. Get in line. If you don’t have the passion to quit your job and go after it, it’s likely we’re going to have problems.

Jeff: We expect you to take the risk, get out of your comfort zone, and put your skin in the game. The other problem, if you invent things in your spare time and have signed and IP agreement with your employer, it may technically belong to your employer. You can either quit your job, or get a formal letter from an employer saying they have no claim on your idea.

FUNDING SOURCE
They displayed a graph of valuation levels and money required, and what types of funding sources match those levels.

THE FIRST MONEY
Rob: What is the right amount? We’re often giving them money to get to the point where they can raise their next round of financing. We try and figure out the run rate and when that success point is and how long it will take to get them there.

Jeff: The usual first round/angel funding is around $1M.

Rob: There are plenty of companies who may give you $2M or $4M to reach that next funding point, but it’s probably not going to be us.

Rob: So how do you find and choose investors? Check all their websites and blogs, and ask around.

Jeff: How do you choose between these people? Find the ones who will really work with you to build the company. They’ll give you access, help you network, and they fit with your goals.

DILUTION
Rob: Just to explain dilution really quickly. Let’s say there are three founders who each own a third of the company. We say the company is worth $3 million today, and we invest $1 million. So now we and the founders own 25% of a $4 million company.

Jeff: Additionally, we usually ask that the options pool for future employees is set up pre-money. This means that we may ask that 20% of the company is set aside for options. So there is dilution from the investment and the options pool.

FUNDING MODEL
Rob: In the seed round you check to see if the idea is feasible. Risk is high and valuation is low. When you hit the beta phase, the risk is lower and valuation is higher. When the model is definite and proven, the risk is low and valuation is getting really high. It happens really quickly now. Getting customer acceptance used to take a few years, and now it takes 3-9 months to figure out.

The Funding Process

1. Pitch
2. More pitches
3. Due diligence
4. More pitches
5. Partner’s meeting
6. Termsheet issued
7. Terms negotiation
8. More due diligence
9. Legal docs negotiation
10. The funding
11. Money in the bank
12. Get to work

Oren Michaels from Mashery

Oren: In my case, raising money was a little different for Mashery because I had already built some relationships with these investors. The people who will invest in you need to know you. They aren’t investing in your idea, they are investing in you. So they’ll ask, why you? Why should we invest in you?

Oren: After I left Feedster I talked to Josh Kopelmen who wanted to meet to see what I was doing next. We took a small amount of money in the beginning because we didn’t have a team or hadn’t done much. We gave up a chunk of the company to get money so early, but getting it going quickly was something we needed to do.

Oren: We didn’t worry too much about valuation or getting the perfect deal. We had to get going quickly so that was the most important thing.

Additionally I’ll be checking out sessions and blogging on anything interesting.