The Inside Round

I would say that most venture backed startups require additional capital after the seed or Series A round. That isn’t a bad thing and typically part of the plan. And everyone knows that going in from the founders, to the early employees as well as the earliest investors.

At some point the company then needs to raise additional capital. (I’ve already written about how to focus your efforts with that early capital so i wont discuss that topic in this post.)

It is very common to seek out a new lead investor for the new round of capital. Why?

Few reasons:

-sometimes the early investors don’t have the ability to “fully fund” the company to profitability on their own. Consider Facebook, their earliest investors didn’t have the ability to fully fund the company (company has raised hundreds of millions of dollars to date). That was part of the plan and obviously worked out for everyone.

-sometimes the early investors and the company want a new investor to price the stock. The theory goes that the market will set the price and the insiders shouldn’t do that to avoid any potential conflict of interest.

-sometimes founders and VCs seek out new investors based on the value add that the new firm/partner brings to the table.

The Inside Round: good or bad?

There are times where a follow on financing does not include a new VC firm. The new round is financed by the current investors. This is known as an “inside round”.

It used to be the case that an inside round often meant something was wrong. It meant the company was unable to raise money with a new outside lead investor due poor operating performance, team, market, whatever.

And sometimes that is a correct read on the situation.

But I believe that is no longer universally true.

In fact, an inside round could mean the company is stronger than ever. The company could be profitable, it could be capital efficient, or it could be crushing it. As a result the current investors may feel very comfortable offering the company a higher valuation for the stock which is compelling to the founders.

And that shouldn’t be a surprise if you think about it. After all, the early investors should know more about the company, team, performance and opportunites than most new investors. Further, if the offer is compelling to the founders, then the inside round will also save the company significant time and energy since fund raising is a big effort.

I’ve seen a number of inside rounds over the past few years in some great companies. And I’m thinking we are going to see this increase in the future – especially with startups that are capital efficient.

I’m sure a number of outsiders will see those inside rounds and see weakness. But it may very well be the other way around.

Giving Blippy a try

I am very excited about a new service that launched recently – Blippy. In early 2008, I was hoping someone would create a similar service.

In case you aren’t familiar, Blippy is a way to publicly share things you buy with others. If Twitter asks the question, “what’s happening?” and foursquare asks you “where are you?”, then Blippy is asking “what did you buy”?

My biggest issue with current online reviews is they are often gamed. Or the reviews are all over the map and it’s hard to match content with context. I would rather see what my friends are actually buying (what hotels they stay at, what products they buy, what movies they see etc).

I’m sure lots of people feel their purchase history is a private matter. But I believe the upside is bigger than the downside as users (and you can always select items you want to hide). And, Blippy has the promise of the more you give the more you get. It’s easy and the data is extremely valuable.

The service is currently in private beta (screen shot below). If you are a fellow early Blippy user then you can check out my profile here. I’m interested to see how this one goes.

Remembering the upside of rejection

At my first job (which was a startup) they did this thing after you worked there for 90 days. They would get everyone together and make a big deal about the new person and their role in the company. Then, they would give you these set of cubes.

I also remember that everyone had kept these cubes on their desk at that company. It was a cool thing that was part of their culture.

I still have mine. They are a bit scratched up as you can tell from this photo I took the other day.

But I keep them around because they remind me about the upside of rejection.