Money For Dummies: The Rise Of Successful Startups
If you've ever read about startups that were practically unknown, but nonetheless on the rise, you've probably had to be convinced of their progress in one way or another. For instance, you may not have heard of the mobile dating app Lulu before today, but the fact that it has over one million users may give you confirmation that the hype surrounding it is legit. You also may not have heard of Startup Institute, but when you consider the fact that the company is opening up their third branch after a little over a year of existence, you're inclined to keep listening.
When it comes to learning about businesses, there are certain buzzwords that trigger a decrease in skepticism. Profit, revenue, usership: all of these relevant terms can transform you from a critic of to a believer in a certain product. And then there is the amount of investment that a company draws during its seed funding round.
22-year old Stanford grad and Clinkle CEO Lucas Duplan, for instance, raised a staggering $25 million from some of the biggest investors in the game during his company's first round, which was led by Accel Partners, a Silicon Valley record. Of course, all of this means nothing if you don't know what a "round" is. And in a world that sometimes seems over complicated, the main idea of rounds can get lost in the many details that have to be translated -- what does it mean to "lead" a round and who are or what the heck is Accel Partners? Allow us to explain.
For starters, we should take care of first thing's first. A "round" more or less describes a set period of time during which a company promotes itself and its potential. Startups can literally hand around copies of their portfolios (more formally known as a prospectus), which are usually filled with extensive information detailing the important aspects to any group or company that wants to study the numbers of their potential investment. After all, if you're going to put your money into something, you have to scrutinize its chances to make profit and have staying power.
For instance, some of the main questions an investor will want answered is why the startup has opened a round in the first place, and what the amount of money they raise will go towards (for example, enlarging the staff). Essentially, a round is a time during which companies raise funds to make their next big move and clarify their planned trajectory.
When a group is said to have "led" a round of funding for a startup, it implies many things. The first is that this group contributed the most money. Second, they are likely to have helped the startup find other investors to contribute to the round, while the lead investment group can even help iron out the legal formalities (handing out pieces of a company to different groups of people, naturally, is a complex ordeal).
Accel Partners, as we mentioned above, is the firm that led Clinkle's major round of investing. Accel Partners is one of the most notable venture capital firms in the country and part of a select group of firms that's enormous success provokes thoughts of fortune when associated with up-and-coming businesses.
In short, they are the big boys of Silicon Valley, the capital of the country's booming tech industry. Other major names include Accel, Andreesen-Horowitz, (investors in Rap Genius), First Round Capital (backers of LinkedIn) and many others.
Ultimately, these are the basics anyone needs to know when it comes to understanding the concept of a company's first round, also known as the seed-funding round.
A big name and big number does not, however, equate to automatic success. In fact, there are some experts who advise young entrepreneurs to shy away from these types of early investments. Many people have argued, for instance, that the $25 million Duplan has drawn in for Clinkle isn't such a good thing, especially considering that Duplan's product hasn't even hit the market yet. There are fears associated with a company like this that hasn't done anything yet, despite its potential, and many worry 22-year old Duplan could owe everything to his investors.
All in all, the goal of a round is usually to provide help for a founder or a CEO without having to sell one's entrepreneurial soul. Even Jon Oringer, the founder of Shutterstock, needed the help of an investor regardless of the fact that he advises resisting giving up equity in a young company.
"Eventually we took a small [private equity] round in 2007," Oringer told Inc. last October. "It wasn't because we needed it (the company pretty much funds itself). It was just a risk-offsetting move, plus, I was looking for a smart investor to help me scale up the management team and build out the processes for growing a 40-person company to a 200-person company."
All details considered, however, the size of an investment a company rakes in during early round can serve of an indication of just how big of a project is underway.
Photos via Inc, Wired