A Venture Capitalist's Valuation of your Company

A Venture Capital (VC) fund sources capital from traditional funds, such as pensions and endowments, and in turn invests that capital in early-stage companies, more commonly known as start-ups.

The raison d'etre of the VC is that investing in start-ups carries a very high risk, and a substantial amount of time is required both in identifying a portfolio of companies in which to invest, and subsequently managing that investment to maturity (to IPO or sale of the companies in the portfolio).

A VC fund is normally structured as a partnership. The providers of capital to the VC are known as Limited partners in order to distinguish them from the General Partners, the executives who actually manage the VC fund.

The Limited Partners drive the incentives of the VC fund, requiring the VC to provide returns of 5-6% on its portfolio.

Given a finite amount of investment capital, the VC must identify and value start-ups in order to select an optimal few to include in its portfolio. The VC understands the composition of its portfolio and knows that potentially half of the selected companies will fail, returning zero on the investment.

Here lies the problem from the point of view of an entrepreneur who believes they are onto a good thing.

Because the VC must compensate for the bad eggs in its portfolio it also drives down the valuations of the good companies, so that eventually the portfolio is able to return the required 5-6%. That means the VC expects its good investments to return substantial multiples of the capital provided, sometimes as much as 20 times the amount invested.

In the light of the above, the best solution for the bona fide entrepreneur is to de-risk their start-up as much as possible, by having achieved credible milestones, before approaching a VC fund. Then they will be in a better position to negotiate a decent valuation for their company.

Facebook's Unfair Advantage

Facebook's success is no accident.

A common theme among Facebook's groupies, you know: the BBC, the Whitehouse, the Arab Spring, and Satan - just to name the illustrious few, is rather about how awful the privacy policies are at Facebook, and how "really they should get their act together".

For a start-up Facebook represents something more... sinister: perhaps more a barren neighbour intent on stealing your newborn child, than a platform on which to build your future home - as Facebook would like us to do.

Facebook are doing well because they are good at all the little things that matter: you can even see each person on this bustling planet who liked that clever comment you made on your great-aunt's "wall" on her ninetieth birthday.

Facebook have built on their seemingly non-commercial operation so far (well relying on advertising in order to generate a tidy billion or two is apparently not really a nouveau riche thing, darling) in order to earn goodwill amongst many institutions that otherwise look askance at businesses that are there "just to make a profit" (which of course no self-respecting, profit-seeking business will admit to).

As Facebook advances into new markets that will mean the death of a thousand start-ups. But that is all fair and square: competition after all is the cornerstone of a market economy.

But do we really have to put up with the free publicity and cheer-leading that Facebook receives from venerable institutions such as the BBC?

A domain name for your company

Cyber squatters are a squalid lot. But what can you, the budding entrepreneur, do?

Once you have discovered that your preferred name has been taken, go for a long stroll, for there is little you can do under the present state of affairs.

After your walk it is possible that you may start entertaining ideas such as "it shouldn't really matter if I call my company TheOldCuriosityShopThatOnlySellsRockingHorses.Com, because after all people will go to Google and type 'the' just to find my website".

Sadly that will not work. Because until you have made it big you will be required to spell that name out to each and every soul whose a*** (a** to you Americans) you have to kiss on your way to making your first billion.

There are two possible solutions: think up a nonsense name that has all the required characteristics: short, plausible, unambiguous spelling, three syllables or less; and pray that the evil Cyber Vermin have not got their rancid claws into that one yet; or alternatively try to come up with a slight variation on the spelling of a meaningful name - those are less likely to have been taken.

But remember: if you can't spell it out without drawing breath, the marketing people will only point and laugh.

Should startups pitch?

Showing an audience an idea in an unfinished website may not be a big risk.

There are likely to be many future developments that only exist in the minds of the founders.

Furthermore, there are many developments that can only evolve from a certain set of initial conditions that are unique to your website. These are only likely to be released to the public progressively once the website is launched and people start using it.

A website is a complex beast.

There aren't many websites around with just that one single feature that can make or break them (if copied by someone else).

If your website does have such a feature then consider applying for a provisional patent.

Patents in the UK and EU

Patents are a necessary evil. At recreyo we believe the web should be fair and free. 

Patents are an asset to carry on your balance sheet. They should be used only as a defensive mechanism, a sort of "speak softly and carry a big stick" approach.

UK software patent law only protects "technical solutions" and not business- related solutions. That means if you were to invent a new method of communication between mobile devices using software then that is a technical solution and patentable. But a lot of what goes into a website are just solutions to business problems and hence not patentable. 

However, you can protect your inventions in the US by making a provisional application. Make the claim in your provisional application as wide as possible. It can then be split into multiple non-provisional claims if necessary.

After following on with a full patent application, it is possible to apply for a worldwide patent that gives you 30 Months in which to file individual applications in PCT member states.

All websites after all are accessible globally.

Disclaimer: We are not a law firm and the claims above should not be construed as legal advice. All relevant information on this blog is freely available on the USPTO website and on Wikipedia.