MattMaroon.com

Someone asked me recently what the most interesting thing I’ve learned from doing a startup was. I couldn’t think of one specifically that stood out, but here are my top two.

#1: It’s probably easier to raise $5 million in funding than it is $500,000.

That’s not what you’d expect. I would have guessed difficulty in raising funds would be linear, but it isn’t.

The primary reason is that there are two typical investors: angels and VCs. Angels are just wealthy people who typically sums of between $10 and $100k, with $50k probably being a good average.

VCs are institutional investors who raise funds often totaling in the hundreds of millions, and are paid in such a way that they are incentivized to deploy the entire amount into investments. So, VCs like to make bigger investments because then they can make fewer. That means less due diligence, fewer board meetings, etc.

Not many VCs make it their business to invest amounts of money that small. It happens, but it’s often just something they do to lock up right of first refusal on future rounds. A lot of companies would much rather raise $500k than $5m, so they’ll do it if they like you enough, but it’s relatively uncommon.

Raising $500k from angels means convincing somewhere between 5 and 20 different people, all with their own habits and goals, to invest in you at the same valuation and terms. That happens too actually, even outside of the few syndicates that exist, but again, it’s hard to pull off.

#2 Our patent system is deeply flawed, but it works pretty damn well in spite of itself.

Before starting up, my view of patents was pretty simple. You invent something, submit a patent, and if approved you’ve now earned the right to make it exclusively. Sounds easy, right?

In reality it’s anything but. An actual patent does little beyond give you the basis with which to sue someone. And when you do, you’re not on very firm footing, as patents are overturned possibly more often than not.

It turns out they’re anything but ironclad rights to a monopoly on your invention. They’re really just ammo. They seem to function, in the real world, much the way nuclear weapons did during the Cold War, to create a sort of mutually assured destruction with each company’s arsenal preventing their opposition from pushing the launch button. The legal fees involved most often wouldn’t be worth it for either party.

Also there are the patent trolls (more akin to terrorists with roadside IEDs in the war analogy) which I think are an integral part of a working system. Most people dislike them (hence the name) but they serve a valuable purpose, which is to create a secondary market for IP, further incentivizing innovation.

Trolls don’t just pull patents out of their ass and start suing. They buy their IP from companies, often ones in bankruptcy, which gives a little back to investors who might otherwise have lost it all, encouraging them to try again. Or they buy them directly from inventors, freeing people to create without having to worry about executing their innovations as a business. A lot of brilliant inventors don’t have the slightest interest in the process of manufacturing a product or getting it onto store shelves.

Certainly the trolls go too far sometimes, but on the whole it’s a respectable business model, and one that I think encourages, rather than stifles, technological progress.

(Note that I’m not necessarily talking about software patents here, which I think are the biggest blight on the system, just patents in general.)

This entry was posted on November 16, 2008 at 10:40 pm and is filed under Startup . You can follow any responses to this entry through the RSS 2.0 feed Both comments and pings are currently closed.