Guest author Derek Brown is a technology executive and analyst who blogs at One Blind Squirrel.

Pinterest is a three-year-old start-up with what is rumored to be no revenue to date. Zero. In fact, by all accounts, it hasn’t even attempted to generate revenue yet. In three years! Hard to fathom in this day and age, isn’t it?

And, yet, some of the sharpest minds in the venture capital community are so confident in Pinterest’s team and business that they recently invested in the company at an eye-popping valuation of $2.5 billion. Yes, billion!

If you were involved in the Internet economy of the late-1990s, as was I, you may be rolling your eyes right about now and muttering to yourself about Pets.com, Kozmo, Webvan, theGlobe.com, govWorks, Boo.com, eToys and all the other so-called-companies that were, for one brief moment in time, valued as if they had discovered the cure to cancer, only to be out of business a few short quarters later. Ahh... the memories.

Assuming that Pinterest’s investors share many of the same recent memories (or, more aptly, nightmares), what could be so compelling about the company and opportunity that would justify their support of such a lofty valuation this time around?

Passion At Scale

In short, I believe it is the economics of passion at scale.

Pinterest, in its own words, is “a tool for collecting and organizing things you love).” (Italics mine.) By pinning images from around the Web to their own board(s) or browsing others’ pinboards for images (which can then be “liked” or “re-pinned” to their own board(s)), users are able to create, manage, share and discover highly personalized image collections that define their passions.

Vintage fashion. Wind surfing. Gourmet cooking. Disneyana. Digital photography. Wedding gowns. Home decor. Camping. Italian design. Rolex watches. Travel planning. Architecture. Mid-century furniture. Urban farming. Knitting. Cross-Fit... The list of people’s passions is literally endless; and, Pinterest helps its users collect, organize and maintain all of them. On their own (or, with the help of the broader community). In granular, image- and/or SKU-specific detail.

Self-identified passionistas on a product-by-product basis — are you kidding? I’m not sure a marketer or merchant could dream of more fertile ground among a set of unknown people, short of seeing a prospective customer standing directly in front of items on a shelf, with cash already in hand. And, I’m not even convinced that would be more compelling on a long-term basis.

What could possibly be better? How about having that level of insight into the interests and intents and aspirations of not hundreds of thousands, but tens of millions, of people per month! According to press reports, Pinterest is already doing just that, hosting roughly 30 million unique monthly visitors who are generating more than 2.5 billion page views, the majority of which are likely coming through little more than domestic word-of-mouth promotion.

Fast forward three years and I think it’s entirely reasonable to assume that Pinterest is successful at growing its user base and traffic flows by 5 times, fueled by existing users continuing to build out their identities, waves of more mainstream domestic users finally catching on and contributions from millions of new pinners (their word, not mine) in overseas markets. That’s a lot of passion under one roof!

Passion Pays

On the business side of the house, passion pays. Extremely well.

Advertising, alone, could generate several hundred million dollars of revenue per year. Let’s say, hypothetically, that Pinterest follows in the footsteps of virtually every sizable media company on the planet, by introducing advertisements of some sort across its pages in the next few years. With marketers across every vertical likely salivating at the prospect of reaching into the company’s massive, impassioned and finely segmentable audience, it seems more than plausible that advertising rates across the company’s site could be at least 50% higher (if not considerably more) than the current industry average. Accordingly, with 12.5 billion page views per month (three years from now) and a site-wide CPM of, say, $4, Pinterest would generate advertising revenue of roughly $50 million per month, or about $600 million per year.

And yet, despite this sum, Pinterests more intriguing revenue opportunity at Pinterest lay in its role as a direct facilitator of online commerce.

Passions, as we all know, cost money — lots of it, over extended periods of time; and, it is money that we are, on some level, actually excited to spend. So, whether it’s a weekend warrior who pins a Burton snowboard, or a hobbyist portrait photographer pinning a Zeiss lens, or a budding interior decorator who pins the perfect accent table on Fab, Pinterest has the potential to become an economic kingmaker when these enthusiasts transition into consumers looking to purchase the goods/services that bring their passions to life.

Projecting Pinterest's Numbers

To appreciate the financial implications of Pinterest’s role in the transaction cycle, think of the service as a massive affiliate that gets paid for delivering customers to online merchants. If just ~3% of its 150 million+ users (three years from now) decide to indulge in their passions by clicking from a "want-to-have" product image on one of their own Pinterest boards to a relevant online merchant, the company could claim a direct role in driving 4.5 million transactions per month. Assuming an average transaction size of $200 (remember, people are buying their passions, not everyday staples), Pinterest’s users would account for ~$900 million worth of monthly purchases. Were the company to receive a 7% affiliate “take”/lead fee/commission on these sales, it would generate transactional revenue of about $60 million per month, or $720 million per year.

As if annual revenue of $1.3 billion (from just two sources) weren’t enough, the company’s margin profile has the potential to be the envy of most. Based on my 15+ years of experience evaluating a wide variety of online marketplace business models, it wouldn’t surprise me if Pinterest were able to sustain gross margins of 90% or more and adjusted EBITDA margins comfortably in excess of 25% (even while continuing to invest heavily in future growth). At these levels, the company would generate adjusted EBITDA of approximately $325 million per year.

Worth It? Or Not?

So... were Pinterest’s investors ultimately wise to value the company at $2.5 billion? No comment.

Will the company generate any annual revenue, let alone $1.3 billion, and adjusted EBITDA of $325 million in a few short years? I don't know.

Will Pinterest eventually be worth $5 million or $50 billion? I can’t wait to find out.

Those purposeful vagaries aside, though, I clearly see the underpinnings of a company with tremendous potential and, if I squint just enough, a business that could be the driver of billions of dollars of passion-fueled online commerce each year — and that’s a position that few companies ever even have the chance to dream about.

Everyone talks about the difficulty and importance of securing funding for your new startup. But that's not the only way to go. Plenty of startups intentionally avoid taking investor cash in an attempt to control the direction of their companies and focusing on product.

So called "Bootstrapping" can be a boon or a bust; you might be missing out on the kind of fast growth a only major cash infusion can provide, but running lean has advantages too.

For insight, we asked seven experienced bootstrappers from the Young Entrepreneur Council (YEC) to share, firsthand, the biggest benefits they've seen from bootstrapping - and what startup founders need to watch out for.

1. You Don't Need Money To Teach About Money

I bootstrapped my most recent startup because I didn't want to lose control of the creative direction before I had proven the concept and sales model. I'm working in an area which has little-to-no track record (financial literacy education for young kids by working with financial institutions as distribution channels), and I wanted to test it first before having to answer to someone who wants to do it his way. An upside to doing it this way is that I am acutely aware of my spending decisions and make them with much thought, but this can also be a downside. There is never a clear "right way," so I continue to bootstrap until my gut tells me otherwise and/or a great opportunity presents itself. - Darrah Brustein, Finance Whiz Kids | Equitable Payments

2. Don't Strap Your Startup Too Tightly

The biggest benefit of bootstrapping for me is that I own 100% of my company, which means I have the freedom to take it any direction I please. There are no outside investors with their own special interests. I am solely responsible for the success or failure of the company. This, in turn, causes some drawbacks as well. Advice and opinions from investors can be very valuable and beneficial to the growth of your company. In addition, their networks can also produce connections that weren't previously available. However, I've learned quickly that there are many successful entrepreneurs who are happily willing to give advice and direction without wanting anything in return. It's up to me to reach out and show genuine interest in their advice and experiences. - Shahzil (Shaz) Amin, Blue Track Media, LLC

3. Trading Growth For The Ability To Pivot Quickly

Contrary to what you might think, being in bootstrap mode actually makes pivoting easier. With a lean operation, the costs for dropping ideas and moving in a new direction are minor, whereas the sunk costs that come with pivoting with money can be nerve-wracking. The biggest drawback is the loss of opportunity for rapid growth. There can be instances where hitting your niche hard and fast is crucial to establishing yourself in your market. A cash infusion at the right time can be what saves your company from the startup graveyard. - Nanxi Liu, Enplug

4. Keep The Profits 

One of the most under-recognized benefits to not bringing in outside funding (in particular, institutional or VC money) is that it means if you create a profitable company, you can actually distribute and enjoy those profits - meaning you can have a positive (and ongoing) outcome outside of a liquidity event. VCs are not interested in receiving dividends - it's just not in their business model. They want cash to sit on the balance sheet, or even better, see it all thrown back into the business (even if there aren't necessarily good places to put it). - Michael Mothner, Wpromote

5. Focus On The Customer

The greatest thing about bootstrapping ColorJar is that our management team gets to do what's best for our customers, rather than our balance sheet. By all means, we're trying to run a strong business - and we've grown quickly - but if we want to take a calculated risk or go the extra mile for a client when it's not in the budget, we can just go for it and act quickly. The drawback of bootstrapping is managing the ebbs and flows of cash flow without a cushion, but banks can help there. Overall, we're a better company with a better process and better service because we've grown at our natural rate and not at the rate required by capital injection. - David Gardner, ColorJar

6. The Ability To Keep A Day Job

I bootstrapped my business for almost seven years while working 80 to 90 hours per week as an investment banker and later a VC. It was a significant personal sacrifice, but I was able to reinvest 100% of the cash flow from Varsity Tutors and a large percentage of my "day job" earnings into growing the business. As a result of that initial sacrifice, money was spent improving every aspect of the company's operations, as opposed to paying myself a salary. Since I had a day job upon which I could rely, it allowed me to be far more aggressive with the investments we made in improving the company. The downside was missing years of social activities. In retrospect, it was certainly worth it. - Chuck Cohn, Varsity Tutors

7. Don't Spend Money, Make Money

In my experience, the biggest benefit of bootstrapping was learning how to offer a great-quality service. Because we weren't funded, we had to make money, and the only way to do that was by offering a great service and hustling. Bootstrapping makes you grow as a person. It's tough, stressful and full of ups and downs. And those things teach you invaluable lessons. - Zach Cutler, Cutler Group
 
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.

Guest author John Fearon is CEO of Dropmyemail.com, which backs up emails in the cloud.

As a CEO/Founder of a startup, you might very well find yourself seeking to raise $1 million.

Imagine your investors say "Yes" and you get the money. Is it really time to celebrate?

That depends on the valuation of the deal. Many startups struggle to get the proper valuation with the right amount share dilution with their initial rounds of funding. It can be tough to balance the need to keep the lights on at your struggling startup versus the loss of company control and a lower eventual payout.

Greedy investors have been known to take advantage of this to get a bigger stake of your company at a lower valuation.

If you find yourself in this situation, you should bit the bullet and call off the party. Just say "No" to the investment.

Every "No" Gets You Closer To A "Yes"

In most sales bibles, it is decreed “every 'No' gets you closer to a 'Yes.'” The more people you pitch to, the more doors you knock on, the more cold calls you make, the more sales you will close. Don’t be afraid to be turned down by investors or turn them down. Keep knocking on potential investors’ doors and you will get there.

Remember the much fancied “80/20” rule, where 20% of the people you speak to will give you 80% of your desired funds. If you need $200,000, you need to speak more than 20 potential people about it to have a chance to land the 4 - 5 investors you need.

Why "No" Is A Good Thing

If you're pitching your startup to investors and you're getting an overwhelming amount of Yeses - it is likely that you have set the price too low. Assuming that your startup is doing well and there is significant interest from investors, you should be able to value your company higher.

Multiple interest from investors is an indication that you should maximize your opportunity. To avoid cheapening your company's valuation, set the appropriate price point, once again, according to the 80/20 rule. If more than 1 in 5 investors agree wholeheartedly to your offer, stop and readjust until you reach at least that ratio.

Know When To Stop

Raising money for your startup can be absolutely critical to keep the business going. It is also necessary to know when to stop searching for capital.

If you raise cash equal to the total amount if your company's valuation, you no longer own your company. Fund raising efforts should aim to keep valuations at levels that leave sufficient portions of the company to the founders. Ideally, you want to ced 15% - 20% of total valuation per funding round and retain 25% – 30% for when your company eventually cashes out - either by being acquired or even with a public offering.

That means you want to raise enough to get to the next stage - not to pad the bank account. Each round of funding should have a goal (to hire more developers, set up an overseas office, create a major publicity blitz, etc). Don’t sacrifice more equity just to feel secure – there are always future rounds to find the cash you may need.

No Time To Waste

Working 24/7, startup founders do not have the benefit of free time. Every second has to be well spent - you can't afford to waste time raising excess cash. It can take 1-2 days to pitch your business and weeks to get an for an answer.

Keep in mind, if 4 in 5 investors turn you down, you could waste 4 – 8 days just retelling your story and business plan. If you're running out of time and money, it's acceptable to lower your valuation to a get deal done to keep the business afloat.

To keep meetings productive for all sides, be upfront with your potential investors about how much you want and how much time they have to respond. Focus on those investors who have the funds and track record to give your company what it needs.

No More Investors Than Needed

Though you may request the same investment from every one you approach, each investor will come in with different amounts and offerings. Besides money, investors can open up their network to introduce others to fund your company. Their advice could also be invaluable to your business.

Always pick and choose carefully – not all investors add value to your company. Some will bring excessive headaches - like asking for monthly or even weekly reports. They may insist that you change your strategy and pivot when it's not really necessary. They may say they are protecting their investment, but the founders' standpoint, it will seem more like non-productive micro-management.

Summary Of Nos

Startup life is a hard path. It is only human to yearn for positive re-inforcement instead of rejection, especially from investors. But valuations are subjective – it will be whatever you and your investors agree upon. And saying "Yes" too early usually won't get you the best valuation for your company.

So as you raise funds and set valuations for your startup - it actually makes sense to eek out refusals. In fact, the more "Nos" you get, the better off your startup may be.

Hold out for the right valuation, regular stock dilution and appropriate investors. And revel in the surprising power of saying "No" to $1 million.

Money - most startup founders need it at some point. But when you're raising outside capital, cash can come at a very high price if you're not on the same page as your investors.

Where many startup founders go wrong in the fundraising process is focusing more on the offer than on who's making it. Thinking about the cash instead of who's investing it. So We asked 10 entrepreneurs from the Young Entrepreneur Council (YEC) to weigh in on what exactly they expect from their investors, and why.

1. Domain, Demand And Delivery

While closing a VC-led investment this month, I learned to focus on three key factors when searching for investors: domain, demand and delivery. First, make sure you add domain experts to your team early. At LabDoor, we compete in the complex digital health field, so adding a strategic partner like Rock Health was very valuable for us. Thousands of investors have the money you need, but only one to five will be lucky enough to be a part of your next funding round. Get investors to fight over you, and find the investors that demand to be a part of your team. Finally, think of your investors like UPS: what can they deliver for you? Whether you need connections to an important business partner or access to a big institutional customer, find the investors that provide the highest value. - Neil Thanedar, LabDoor

2. The Network

It's relatively easy to get your hands on money: If you've got an appealing investment, you'll have to beat them off with a stick. But it's almost impossible to meet the right people to move your business forward without personal introductions. I'll always consider the connections that an investor (or anyone else) can bring to the table over anything else. It works the other way around, as well - I've gotten the most interest from investors who I've been personally introduced to by someone I know. - Thursday Bram, Hyper Modern Consulting

3. Integrity

I want to know that the investors I work with do what they say they are going to do. Those types of people are hard to find. It's exciting when you're offered a great deal, but it's important to look at the big picture and examine who you're going to be working with, what others say about them, and what your gut is telling you. Investors do a lot of due diligence on the entrepreneurs they are working with but I don't see enough entrepreneurs doing the same intense due diligence on their potential investors. Admittedly, I've made this mistake too. What I want to know without a doubt is that the investor I'm working with has a lot of integrity and their investees and peers sing their praises. Rave reviews from others is very important to me. - Natalie MacNeil, She Takes on the World

4. A Silent Angel

I no longer seek the multimillion-dollar Series A round that will lead to a Series B and C. Our startup was built with a user-acquisition model vs. an actual "generates-profits model." The larger the investment, the more control you're going to give up, and the larger the exit needs to be. Instead, I look for opportunities with a clear profit model from the beginning that leverage a skill set or network that I currently have. And I don't take funding for them until I'm ready to scale the company, which means that I've built the product and proven that it makes money. I therefore look for an angel investor that is looking to invest $50,000 - $100,0000 and will leave my team and I alone. We know what to do; the added funding is there to help accelerate the process. - Jun Loayza, Passport Peru

5. A Smaller Portfolio

If you're looking to earn startup capital, you should always scrutinize investors. An investor should be as energetic about, and invested in, your organization as anyone. I recommend someone who has a smaller portfolio, filled with businesses similar to your own. When I started, I looked for outside investment. My search took me to an investment bank I'd interned with in college. The owner's portfolio was huge and successful, and I thought that's what I wanted. I realized, because of his portfolio, that he didn't care at all about my business. I decided to retain full ownership. Don't be too quick to jump on startup money. Find the right fit. - Brian Moran, Get 10,000 Fans

6. Experience - And the Wisdom Not to Rely On It

It's a cliche to say you are looking for an investor to bring experience into the board room. But the reality is that investors are a great voice to have around if they can offer their experience and pattern recognition to help you avoid missteps. Our company was fortunate to have Meg Whitman, former eBay CEO and current HP CEO, as an investor and board member. What is most impressive about Meg is that she brings incredible and relevant experience in building a marketplace - really the most powerful peer online marketplace in the world. But she's also wise enough to temper her advice with the knowledge that things have changed. And that's the standard I look for - experience that is telling and useful, but the wisdom to color that experience with new realities. - Eric Koester, Zaarly

7. Deep Experience in Your Industry

As a former management consultant, I learned that the number-one benefit that major companies found was that their consultants had worked with competitors. This is not about taking proprietary information, but rather about knowing industry best practices, how to apply them, and what non-obvious questions to ask. Unless you are an incredibly seasoned entrepreneur or someone with deep industry expertise (i.e. a PhD or 20 years of experience), you don't know what you don't know. Having investors who can teach you and ask you tough questions is incredibly valuable. - Aaron Schwartz, Modify Watches

8. Would You Have A Beer With Them After Work?

Investors should be experts in their focus industries, but should also be capable of admitting when they don't know something. I place extra value on humility and candor, which can sometimes be hard to come by in the investment community. When we were raising money for RJMetrics, we focused on investors who could step up when they were subject matter experts and yield to others when they weren't. For me, these are also the same kind of people that I enjoy having a beer with after work. This is critical to building a healthy, honest relationship with your investors. - Robert J. Moore, RJMetrics

9. Everything But The Money

Find someone you can trust. Picking an investor is like picking your spouse. Sometimes it's even harder to get out of a bad investor relationship than a bad marriage - make sure it is the right choice. When AdVentures made an investment in my company I looked at everything but the money. Did the investor have knowledge, connections, and experience to help take my company to a new level? All of the answers were yes, so it was a no brainer for me. - John Hall, Digital Talent Agents

10. Do They Walk The Talk?

In our most recent funding round, our new investors came to us because they saw the enormous growth potential for smart parking. They are an LA-based fund that specializes in intelligent transportation investment. After taking a few meetings with them, we quickly realized how excited they were to potentially join our business. Engagement is of the utmost importance. Investors should do more than talk the talk; it's crucial that they demonstrate knowledge of the industry and show why they believe the product will succeed. - Sam Friedman, ParkMe

Venture capitalists are betting that technology will play a major role in fixing a broken U.S. educational system. Accel Partners, Spectrum Equity and Meritech Capital Partners put their chips down last week with a $103 million investment in Lynda.com, which sells monthly subscriptions for training videos in business, technology and creative skills.

The investment was so important for Accel that the global firm was willing to woo the online education company for four years. For Lynda.com, which topped $100 million in revenue last year, the outside investment was the first in its 18 years of operation.

VC Excitement

What has VCs so excited is an educational system ready for technology's transformative powers. The soaring cost of higher education has made college only a dream for many high school grads, while those who borrow their way through risk landing in the poorhouse if they can't land a job. Student loan debt nationally exceeds auto loans and credit-card debt, according to Grading Student Loans, a scholarly blog published by the Federal Reserve Bank of New York.

VCs are gambling that online education startups will eventually remake the system through cheaper, more efficient alternatives to traditional options.

Last April, Kleiner Perkins and New Enterprise Associates helped Coursera make its debut with a $16 million investment. Coursera now has more than 2.3 million people using its free classes in science, business, economics, the arts and law. The coursework is provided by almost three dozen universities, including Princeton, Stanford and Duke. For now, Coursera is focused on building as large a user base as possible and plans to figure out how to make money later.

“Elite education is too expensive, and it’s available for too few,” Kleiner Perkins partner John Doerr told The Wall Street Journal. “I’m not saying accredited institutions will go away, but having great content available for free in the U.S. can transform community college education… and in the developing world as well.”

Other online schooling startups that received millions of dollars from VCs over the last few years have include Pluralsight, 2tor, Craftsy and Lore. In 2011, investment firms spent $171.8 million on education technology companies, which includes online learning, compared to $88.5 million in 2009, according the latest figures from GSV Advisors, which tracks such investments. In the first half of 2012, the amount of investment had already reached $105.3 million.

Direction Uncertain

How dramatically VC-funded startups will change higher education remains unknown. A lot of hurdles remain - with the biggest being accreditation.

To be truly disruptive, online education companies will have to deliver courses that are accepted by employers and recognized by State Universities and Colleges. California, often a trendsetter for the rest of the nation, believes online education can help the state lower college tuition that has risen by double digit percentages for the last several years.

Last Tuesday, San Jose State University signed a deal with Udacity to provide online versions of three math classes this spring for $150 each. While online courses have been part of college curricula for years, the California State University system is now trying to see if the online courses can help ease overcrowded remedial classes for local students. In other words, online education is being used to solve a real problem in California colleges: too many applicants for too few classes.

"Today our aim is to focus like a laser on entry-level classes that can be so difficult for our students," Mohammad Qayoumi, president of San Jose State, said during a public signing of the deal that was attended by California Governor Jerry Brown. "Every year nationally, 1.7 million students need remedial education. That's roughly the population of San Jose and San Francisco combined. We must innovate."

That innovation is exactly what the investments in online education technology companies are trying to create.

Photo courtesy of ShutterStock.

Guest author John Fearon is CEO of Dropmyemail.com, which backs up emails in the cloud.

If you have a startup, ignore the business plan, financial projections, valuations and statistics for now.

Instead, look at yourself.

Would investors spend $1 million to have coffee, much less champagne, with you?

Let’s face it. The entrepreneurial path is a lonely, hardscrabble one that often ends in failure. Statistic Brain estimates that half of all startups fail by the fourth year. So, it pays to understand what savvy investors are thinking when you put your hand out.

It's All About You

There are exceptions, but among the investors who can do you the most good, money is flowing to the people behind startups, not so much to the idea behind them.

Being the person that investors believe in is the surest way to secure seed funding.

As the movie “The Social Network” and Facebook’s About Us page attest, Mark Zuckerberg got his initial capital from his then-best friend, Eduardo Saverin to start Facebook. At that point, Saverin may have believed in the business but he certainly believed in Zuckerberg.

Even venture capitalists look past PowerPoint presentations and spreadsheets to see the “people equity.” Felix Salmon, a financial blogger at Reuters, explains it this way in his post Buying Equity in People:

“Venture capitalists are increasingly investing in a startup’s management team rather than in its business model or underlying idea. Find the entrepreneur and invest in the individual directly, thereby guaranteeing that you’ll have a stake in their success if and when they finally hit it rich on their fifth or sixth attempt.”

To make a mark, startups usually have to raise up to $1 million in the seed round. This benchmark may vary from business to business, particularly if an idea involves a physical product.

Investing In The Entrepreneur, Not The Idea

The initial sums raised are usually invested in the entrepreneur, not the business. And with six zeros in the bank, there is sufficient cash to scale up (hiring of new staff, improving equipment, purchasing of advertising, etc).

The charm offensive doesn’t end then, either. Once funding is in hand, a founder has to inspire all the other people that he or she needs in order to make the idea real. To get through the thin to reach the thick, entrepreneurs have to be the rock to which friends, family, staff and investors alike hold onto.

Is this you? Great! If not, you need to find a magnetic personality to help you do the convincing.

Most entrepreneurs start the same way, borrowing money and looking for investments at every turn. Successful would-be magnates don’t depend on their idea so much as on their ability sell people on their idea.

A subtle distinction, indeed, but an increasingly important one.

Image courtesy of Shutterstock.

Stanford University has a lot of smart people. But the school's nickname is dumb: the Stanford Cardinal. As in the color red. How unimaginative. Here's a better idea: the Stanford Entrepreneurs.

Yes, harder to fit on a souvenir coffee mug but a much more accurate handle. A recent study by business research firm CB Insights shows Stanford dominates all other universities in the field of alumni entrepreneurship.

The first-ever University Entrepreneurship Report tracks companies founded by or led by alumni (and dropouts) from six top U.S. schools - Stanford, Harvard, UC Berkeley, New York University, University of Pennsylvania and MIT - and the funding they've received.

Stanford alums have raised $4.1 billion in 203 financings. Harvard alums are second, at $3.8 billion in 112 financings. But strip out Facebook and Harvard funding drops to just $1.8 billion.

"We did go into the study thinking Stanford would stand out from the crowd but we were surprised at how much they dominated," says CB Insights CEO Anand Sanwal. "The level by which they have a lead was more eye-popping than we imagined."

The University Entrepreneurship Report is of interest to a lot of different groups. Schools like Stanford and Harvard, which used to churn out a lot of investment bankers but have pivoted from that focus, want to see if their shift is paying off.

Where Are The Hotshot Startup Founders?

Investors, of course, want to know where to find the hotshot entrepreneurs.

And the report is of interest to local groups because it also measures "alumni leakage." Are smart students soaking up community resources then leaving town to start companies and employ people elsewhere? Stanford and Cal alumni usually stay put, which is not surprising since Silicon Valley is next door. Harvard alums tend to start companies in places other than Massachusetts - mostly Silicon Valley and New York - but MIT grads are less mobile.

"That speaks to the nature of the startups coming out of those universities," Sanwal says. "When you're dealing with the hard sciences, like at MIT, you might need ongoing access to the specialized talent of the universities and the professors, so you might stick closer to your alma mater. Whereas if you're in tech or social media, you don't necessarily need to be tied to Boston, so you're more inclined to go where the money is."

A Different Kind Of Diversity

At all six universities studied, tech startups attracted the most funding. But Berkeley and MIT alums founded more companies in industries outside of tech.

"We were surprised by the diversity of startups coming out of Cal and MIT and the general lack of diversity of startups elsewhere," Sanwal says. "I expected to see more overall in the life science and clean tech realms at the other schools. I think Cal and MIT are more progressive and forward-thinking when it comes to commercialization of research."

What About Your School?

If you're wondering why your own alma mater is not included in the report, CB Insights chose these six schools because they have the most data. They're also the six with the most entrepreneurial alums.

"We've had a lot of other universities calling us and asking why they're not in the report," Sanwal says. "It really came down to how much data we could capture. A lot of people said why didn't we include University of Chicago, because that's where Groupon started. We wanted schools where there was a consistency of funding across many companies, not just a blip with one hot company." (Or, these days, not so hot.)

Why Stanford Wins

So why is Stanford the big winner? A lot of credit goes to the school's emphasis on technology. A lot also goes to the many angels and VCs who live in the neighborhood. They like to support the home team, as do investors everywhere.

"Boston firm Highland Capital is most active at MIT, New York firm Union Square [Ventures] is most active at NYU and Silicon Valley firm DFJ is most active at Stanford," Sanwal says.

And what about students who want to found tech companies some day. Does this study point the way to the best colleges for them? Sanwal seems to think so: "This begs the question: do you have to go to a top school to get funding for your startup?" he said. "I don't see that changing. It's not just what you know but who you know."

When “Queen of the Net” Mary Meeker landed at Kleiner Perkins she added a new initiative: Help people understand how certain trends were negatively impacting America. Her first report, USA Inc. contained a 468-slide presentation detailing these shifts. Meeker provided an update on October 24 in San Francisco, and it was yet another eye-opener.

In true Meeker style, USA Inc. is a meticulously crafted, chart-heavy presentation. This one, though, paints a bleak picture. Most startling: America’s entitlement costs accounted for 56% of spending in fiscal 2011, 40 years ago it was just 25%. Here is more food for thought:

• Expenses have exceeded revenue in all but five of the past 47 years.
• 1 in 50 Americans needed Medicaid when it was created in 1965. Today, 1 in 6 do.
• Unfunded and underfunded entitlement liabilities now total $66 trillion.

Meeker joined Kleiner Perkins Caufield & Byers in January 2011 and was put in charge of a new $1 billion Digital Growth Fund. On Feb. 25, she issued her first epic report, called USA Inc.: A Basic Summary of America’s Financial Statements

USA Inc. offers four recommendations to help spread its message:

1. Create a deep, widely held perception of the problem’s reality and stakes involved
2. Reassure citizens that there are practical solutions
3. Develop support among key constituencies
4. Determine the right time to deliver solutions.

Meeker is clearly addressing No. 1 by shining a bright light on the topic whenever she can, but what about the other recommendations?

Kleiner Perkins' Investment Strategies

KPCB’s fund specialties include typical investment sectors: digital, green tech, life sciences and China. There was a Digital Growth Fund and a Green Growth Fund, but no “USA Growth Fund.”

Among recently funded companies, KPCB’s digital list numbers 71 companies, excluding Chinese firms. There were also 33 companies in the green-tech portfolio and 18 in life sciences, both included below:

Cleantech is clearly a pro-future investment strategy. But when I examined company descriptions and compared them against Meeker’s recommendations, I found just one that indirectly addressed USA Inc.’s future needs: CodeAcademy, an education innovator.

What Kleiner Perkins and Others Could Be Doing

USA Inc. recommends that the reality of America’s fiscal crisis be communicated to the public. There are a number of ways to address this objective, but a good tactic would be to start with the basics: clarity of data.

While government agencies produce reams of raw information, access to it is not particularly easy. Many economists and analysts use a data front-end provided by the Federal Reserve Bank of St. Louis, called “FRED,” which features a wealth of information: 61,000 economic time series from 48 sources. But using FRED requires learning complicated database queries.

Kleiner Perkins should identify entities that progress the human-machine interface to databases like FRED. A straightforward method would be to use a drop-down-menu interface, à la KISSmetrics Power Report (PDF).

Another approach would be to provide a seamless connection to an intelligence platform like Tableau. The best interface would add a natural-language query layer like Siri.

To reassure citizens that practical solutions exist would require new-age infomediaries that specialize in connecting problems to solutions. Perhaps Biz Stone and Ev Williams could be persuaded to dedicate a Medium content collection to USA Inc. in exchange for a strategic investment. Their crowdsourcing concept would help redistribute this massive content effort.

Toward A "Healthy" Economy

Another clear challenge arising from Meeker’s presentation is the soaring cost of entitlement spending, most of it due to escalating health-care costs. KPCB has invested in two life-sciences companies that could be of help.

Essence Healthcare focuses on Medicare solutions and RedBrick Health aims to reduce avoidable health-care costs. More is needed, such as enterprise software that improves hospital management, given that most hospitals are poorly managed.

Another practical problem solver would be a service that forces competition by finally bringing transparency to health care and its opaque pricing schemes, as Harvard professor Regina Herzlinger proposes with an Securities and Exchange Commission-like oversight entity. Is there a way to reverse-engineer that idea?

With her thorough insights, Mary Meeker has done an outstanding job of circling the wagons around the digital and financial communities to signal that more needs to be done in order to preserve our pro-growth climate. I encourage everyone to give her a standing ovation and join in.

How would you advise Mary Meeker to spend the half-billion dollars still left in her Digital Growth Fund? Sound off in the comments.

Lead image courtesy of Shutterstock.

Not every tech startup enjoys the luxury of launching in Silicon Valley — or Silicon Alley, or Austin, Texas, or another high-tech hotspot.

What’s the solution?

Instead of waiting for someone to offer a helping hand, or packing up the U-Haul and moving across the counryy, try taking the entrepreneurial approach and turning your home town into a high-tech startup community.

Brad Feld author of Startup Communities: Building an Entrepreneurial Ecosystem in Your City, says it can be done.

Feld, who has over 20 years of experience as both an entrepreneur and an early-stage investor, is a co-founder of tech accelerator TechStars and knows whereof he speaks. He bases his book on the lessons he’s learned from 20 years in the vibrant startup community of Boulder, Colorado.

Too often, though, cities trying to build high-tech startup communities make one or more key mistakes that keep their plans from reaching fruition. According to Feld, here are the six common problems that afflict — but don’t have to squelch — startup communities:

1. The Patriarch Problem: Is your city’s startup infrastructure ruled by “old white guys”? If your ability to get funding depends on who you know, where you went to school and where you’ve worked, your city might be suffering from the Patriarch Problem. If funding is based solely on what you do, congratulations - you’re in a vibrant startup community. Getting beyond the patriarch problem is tough (in the worst case, you’ve got to wait for people to die), but can be done if enough leaders of the startup community decide they’re going to ignore the patriarchs and just keep doing what they’re doing.

2. Capital Shortage: If you’re complaining about the shortage of local capital in your city, Feld’s got news for you: Entrepreneurs everywhere — yes, even in Silicon Valley — are complaining just as loudly about the same thing. “Let it go,” advises Feld. Instead, just keep doing what you’re doing, and if you do it well enough, you’ll attract capital from around the country.

3. We’re From The Government, We’re Here To Help: While Feld acknowledges that government can provide some help in constructing and supporting startup communities, entrepreneurs who rely too heavily on government will go nowhere fast. “Government moves at a much slower pace than entrepreneurs,” Feld warns. Just keep doing what you’re doing — don’t wait for Uncle Sam.

4. Do I Know You? A startup community that’s suspicious of newcomers is likely to die on the vine. “In Boulder, when someone new shows up in town, the entrepreneurs swarm them… to make the person feel welcome,” Feld writes. In contrast, if your city makes newbies “earn their way into the hierarchy,” you’re basically creating your own Patriarch Problem.

5. Feeders Trying To Be Leaders: Feld identifies government, universities and venture capitalists as “feeders” who can help support an entrepreneurial ecosystem. The problem occurs when feeders try to be “leaders” and take charge of entrepreneurial growth. A successful entrepreneurial ecosystem must be led by entrepreneurs themselves, says Feld, who cautions that when feeders try to take charge of entrepreneurial growth, they typically slow it down with committees, initiatives and other photo ops that create a lot of noise but do nothing — essentially the antithesis of entrepreneurial behavior.

6. Risk Aversion: Are you afraid of putting your time and effort into growing your own startup community — especially when you’re busy creating your own startup, too? You can’t create a startup environment without taking risks, says Feld. His advice: Jump right in and try stuff, but always set a time limit. If your effort doesn’t work out in that time frame, try something else. Trying — and even failing — without fear is a hallmark of a vibrant startup community.

See a common thread here? “Just start doing stuff and keep doing it” is Feld's entrepreneurial mantra. Startup Communities clearly conveys the contagious sense of energy, enthusiasm and possibility that’s at the heart of the most successful startup communities.

Startup accelerators are great, as far as they go. The problem is that, after startups enjoy several months of pedal-to-the-metal support and mentorship, the vast majority of them exit the programs and hit a brick wall. The cheerleading stops, venture funding never materializes and the founders go back to writing code for a living. NestGSV is trying to fix that.

Like an accelerator or incubator program, NestGSV gives its resident startups office space, advice and lots of other amenities (even a beach volleyball court) at its Redwood City, California, campus near Silicon Valley.

Ecosystm + Incubator = Ecobator

Unlike other types of startup programs, NestGSV is an “ecobator,” an ecosystem plus incubator that brings the many participants in the innovation economy together under one roof so that entrepreneurs are surrounded with all the enablers they need.

Take a tour of the campus and you’ll see representatives from corporations, universities, governments and the investment community. You might even see a bigtime VC like Marc Andreessen in a spirited game of beach volleyball. (OK, maybe not.)

Kayvan Baroumand, NestGSV’s founder and CEO, sees NestGSV as “the evolution of the startup incubator and the startup accelerator.”

Baroumand, the former COO of Plug and Play Tech Center, doesn’t dismiss the value of incubators and accelerators. “They’re actually part of the NestGSV ecosystem,” he says. “They’re an important component. But they’re only three-month programs. And even though they talk about the network, after three months all the startups get booted out of the facilities.”

Startups Remain Vulnerable For Two Years

Baroumand thinks accelerators and incubators can be a lot of help to startups during those brief three months but he points out that most startups are highly vulnerable to failure for a minimum of two years. NestGSV’s solution is to provide ongoing support for startups and connect them with corporate, venture and government programs and funding that can help them survive. Some of them might even be graduates of accelerator programs.

NestGSV can accommodate up to 200 startups on its 75,000-square-foot campus. Currently 22 are residing there, paying $550 a month for a desk with 300Mbps of Internet bandwidth. There are conference rooms with audiovisual systems and seating for 250. Every Friday, NestGSV invites a handful of partners and service providers like lawyers, bankers and investors from its network and they sit down with startups that are candidates for a spot at NestGSV.

“At end of the meeting we give them a one-page report on how we can potentially help them,” Baroumand says. “There’s no obligation to join the facility. The worst-case scenario is that they walk away with the helpful one-page roadmap for their business. The best case for both parties is that they decide to join our community. That really differentiates us from any other accelerator or incubator out there.”

NestGSV also offers regular workshops on leadership, business and technology taught by entrepreneurs, university professors and other experts. Startups participating in NestGSV can attend or not. Sessions aren’t mandatory.

Not Just About Office Space

If you’re familiar with Plug and Play, the model may sound familiar. The big difference, says Baroumand, is that NestGSV is not constantly flogging office space.

“From day one, the most important thing we do with the companies in our facility is to network them and accelerate their innovation and bring all the resources together for them. The approach at Plug and Play is very different. You walk into a Plug and Play and the first thing that happens in the lobby is you get approached by two people trying to sell you real estate. We’re the exact opposite.”

Like Plug and Play, though, NestGSV will invest in resident startups it considers promising. (Plug and Play made its big score with an investment in a startup tenant called PayPal.) “We get very good insight into these companies because we’re living with them,” Baroumand says. “I get to know the good the bad and the ugly. I can predict the companies that will do really well and those that might not make it.”

Baroumand has big plans for the future. He says NestGSV will host hackathons and investor pitch meetings. He plans new NestGSV campuses in New York, Los Angeles, Texas and North Carolina.

Now if only he could do something about that term, “ecobator.” It sounds like some sort of weird... well, you know. We’ll just leave it at that.

Web groceries, sock puppets, podcasting - Internet trends come and go. The trick is to know when the end is near and avoid doing something foolish, like paying $580 million for MySpace. Today, that means consumer Internet startups taking on celebrity investors.

The Benefits Of Being Famous

The temptation is understandable. Celebrities offer a startup many potential benefits. Bold-face names can attract instant attention and help draw paying customers. At the same, they can establish credibility with investors, who these days will fund consumer Internet companies only if they can demonstrate a customer-acquisition cost lower than Kim Kardashian’s neckline.

Plus, the celebs are into it too. Ever since Ashton Kutcher and Bono got (way more) rich investing in startups like Foursquare and Airbnb (Kutcher) and Facebook and Dropbox (Bono), every Hollywood star and has-been wants in on a hot startup.

But if you have a consumer Internet company and you don’t already have a celebrity investor, you've pretty much missed the bus. The startup-star marriage is over. Over like Tom Cruise and Katie Holmes. Over like Paris Hilton and DJ Afrojack.

Every Which Way But Loose

Trouble is, all the good celebs are taken. There are only a handful of stars like Kutcher, who invests serious money and, by all accounts, adds real value to the companies he funds. The rest are just into tech for the buzz. And you don’t want people like that - or their hangers-on - getting their paws on your startup.

“This is typical monkey behavior of imitation and greed,” says Paul Kedrosky, a senior fellow at the Kauffman Foundation who focuses on entrepreneurship and innovation. “We’re all a bunch of apes and we see the other apes doing things that make them money and get them attention, so we imitate. And there’s no place more full of imitative behavior than the entertainment industry. These people are acutely aware of being a fast follower and that currently involves this fondness for technology.”

Kedrosky says celebrities come with the same advantages and disadvantages as other angel investors “but dialed to 11.” Some do have domain competencies that match the startups they pair off with - like Lady Gaga and Turntable.fm - but even then they tend to be fickle. They don’t have the attention span for follow-on investments and they hit the exit at the first sign of trouble. “It’s the usual bipolar disorder you get when dealing with angel investors,” Kedrosky says, “but way more exaggerated.”

Is Your Startup A "Winner"?

Worse, you could end up hitching your company to a Charlie Sheen or Amanda Bynes. “You rise up with them but then they become embroiled in some goat-boy scandal and you fall with them, with no connection to the merits of your company.”

If you feel you must recruit a celebrity, aim for a star with a large Twitter following. “If you are going to get an angel investor involved who’s writing smaller checks, they’d better be able to bring a lot of Twitter followers,” Kedrosky advises. “There’s a correlation between people on Twitter with the most followers and the likelihood they’ll become celebrity investors. I have no hard data but I’d argue that is absolutely the case.”

Make Sure The Stars Align

Also make sure your product aligns with the talents of the star, Kedrosky suggests. “If you have some kind of enterprise application for building cloud services, good luck with that. Odds are you won’t get an A-list actor to invest.”

Whoever you decide to pursue, you should hurry. The celebrity-investor craze is coming to a close. In fact, Kedrosky thinks it’s time to get out of the consumer Internet business altogether.

“As soon as it becomes obvious to people that this is an easy way to make money, then it no longer is easy. So we’re approaching the end of the current cycle. My guess is we’re long past the peak of the consumer Web and the mobile/local/social cycle. It peaked at least a year ago and now you have a bunch of monkeys showing up at the end, not knowing that the meteor has already struck and the fire is coming across the landscape and they are toast.”

Hmmm. ToastedMonkey.com? Somebody get Billie Joe Armstrong on the phone!

Images courtesy of Shutterstock.

Startup contests like TechCrunch Disrupt can generate a lot of hype and interest, but does that translate into any lasting benefit for the startups involved? Sure, winning brings monetary benefits - TechCrunch Disrupt offers $50,000 - which never hurts, but does participating really help a startup succeed? And does winning a key contest really predict eventual success? To find out, we caught up with the winners of the four most Disrupt events:

New York, 2012: ÜberConference

What It Is: Audio conference calls aren’t going away, so Firespotter Labs' ÜberConference made them less sucky. By removing login annoyances (“Can you text me that code? I’m on my cell!”), adding visual controls and giving you something productive to do with your mouse and keyboard while sitting on hours of endless calls, ÜberConference actually makes audio calls cool again.

How It’s Doing: Uberconference is killing it. Just a month after taking home first prize at Disrupt, Firespotter won $15 million from Andreessen Horowitz and Google Ventures. The company is hiring for several open positions, most of them in engineering. iOS, Android and paid versions of the service are due soon, and UberConfernce can monetize its already-solid feature set, prospects look good.

San Francisco, 2011: Shaker

What It Is: Shaker’s founders are betting that users will want to hang out in virtual spaces (starting with a bar called Club 53), represented by avatars. If this strikes you as a little like Second Life, you’re not alone, but the folks at TechCrunch and $18 million in venture funding believed Shaker offers something more than just another chat room.

How It’s Doing: Most avatar-based chat environments have been notoriously anonymous, quickly degrading from social discovery to Leisure Suit Larry. Shaker removes the anonymity by tying profiles to your Facebook account, helping users to meet others with common interests snd form real relationships. Promoters (at this point, mostly bands) sponsor rooms, and Shaker works its magic on the back end to segment the rooms so you’ll actually bump into people with shared interests beyond the band.

For now Shaker remains a bit of a ghost town. As of September 10, there were only two events on the calendar: a Foo Fighters Tribute party with 226 RSVPs, and a “Hangout” the following Sunday with 37. Still, Live Nation has signed on as a promotional partner, which could help Shaker attract the users it needs to really take off.

New York, 2011: Getaround

What It Is: Getaround is AirBnB for car rentals. Owners can list their cars during downtime, allowing drivers to rent them by the hour. Drivers can place up to five requests, and the first response wins the business. One price covers rental cost, background checks and insurance. Owners get a monthly payment for their car, drivers get to drive whatever they want while saving money, and Getaround takes a cut from the middle without having to maintain its own inventory. The concept is a win-win-win.

How It’s Doing: So far, it seems to be still growing. Getaround has signed up thousands of cars, and it’s hiring for aggressive expansions into new markets. The startup’s most recent venture is Getaway, a long-term rental service for drivers who need a car for a week or longer. But over all, the car-sharing market has a long way to go before becoming mainstream.

New York, 2010: Qwiki

What It Is: Qwiki is a slick, simple, online application that lets users create video presentations in their browser. The interface is extremely simple, and and even a total noob can throw together a slick-looking video in less than five minutes.

How It’s Doing: Qwiki works great for last-minute school presentations or fashion retrospectives, but as others have pointed out, it has yet to become the transformative application its founder promised. To date, Qwiki hasn’t disrupted much of anything, but recent ties to more mainstream media outlets could help change that.

Even the hottest startup needs a little time to change the world - or make a billion dollars - so it’s a little early to pass final judgment. But so far, at least, the four most recent Disrupt winners are all still in business - and not every startup can say the same.

At the same time, though, while some have gotten funding, none has come close to changing the world or a transformative financial event for founders and investors. And plenty of other startups - ones who didn’t win startup contests - or doing even better.

Need funding for your startup? Don’t load up your PowerPoint with nifty charts showing all the users your online service has grabbed. Venture capitalists are no longer impressed. These days, investors want to hear about the revenue you’re generating, not the traffic.

“There have been a lot of companies that had a lot of users and didn’t make as much money as they should have, so investors are reevaluating,” explains Naval Ravikant, founder of the startup advice site Venture Hacks and the investor-entrepreneur matchmaking site AngelList. “This became most apparent in the Facebook app craze, when lot of top-ranked Facebook apps showed 60 million or 100 million users but ended up being worth almost nothing. Even Facebook hasn’t been able to monetize as well as Wall Street was expecting.”

Revenue Rules

The new generation of billion-dollar internet companies is built on revenue. Businesses like Airbnb, GitHub and Dropbox all have plenty of users. But much more important, those users generate serious cash flow.

The flipside is that even companies without massive traffic can now attract intense investor interest - if they have real revenue. “A company like Uber doesn’t have a ton of users but they’re making gobs and gobs of money with their high-ticket mobile car service,” Ravikant says. “They have huge margins and high-frequency repeat business.”

You Now Need 20 Million Eyeballs

Users do still figure into the equation when VCs evaluate an Internet startup. But the bar keeps rising. The new thinking, as outlined in a recent blog post by Chris Dixon: 10 million is the new 1 million. And a few years from now the benchmark for consumer Iinternet startups could be 100 million.

“Think about it,” Ravikant said. “Instagram reached 80 million users with only six employees. User stats can get blown out very quickly. But VCs are starting to adjust. There are a number of companies that have come along recently that have generated huge user-number spikes - but either those numbers are not sustainable or they’re not reflective of engagement underneath or they’re not monetizable.”

Take Socialcam, for example. It has a lot of users but can those folks be monetized? Autodesk, which paid $60 million for the video sharing app, will have to figure out the answer. “Eyeballs will always be a proxy stat to get to valuation,” predicts Ravikant, who founded Epinions and [Vast](http://www.vast.com/. “But if you give it a long enough timeline, people will learn to game proxy stats. But they can’t game profits.”

Turns out that many of the highest-usage consumer Internet companies also have the thinnest and least monetizable engagement, which is a big disincentive for investors.

Early Revenue Matters Most

So a lot of Internet startup founders now emphasize early revenue when they pitch VCs.

“That’s for two reasons,” Ravikant says. “First, you can move the needle more on early revenue than you can on early users. If you have a product that’s not getting picked up by the marketplace, getting to 5 million users can seem like an impossible problem. But if, say, you need $20,000 a month in revenue, you can do that just by picking up four or five big customers. Second, a lot of companies have such a low burn rate that if you can get revenue quickly you can get to break-even and sustain yourself much longer. You can do $10,000 in revenue with just four or five really impassioned customers.”

Customers… what a concept!

Eyeball image courtesy of Shutterstock.

In 2000, venture capitalists poured a staggering $112.2 billion into startups nationwide, according to an analysis by the Public Policy Institute of California (PDF). Today, venture capital deal flow has slowed to a relative trickle, just $28.4 billion was invested in startups by venture capitalists in 2011.

Slimmer Pickings

This slimming down has sent shockwaves through the startup world. According to Dow Jones VentureSource Senior Manager of Corporate Communications Kim Gagliardi, 3,404 venture financing rounds were completed in 2011, down 47% from the 6,361 closed in 2000.

Sure, $28 billion is far from being a “trickle” but consider this. In 2005, The Wall Street Journal tried to estimate the “world’s cash hoard” and arrived at a figure of $46 trillion(PDF), based on global insurance, pension and mutual funds holdings alone. That was up 29% over 2000 in just five years.

Granted, 2005 was before the financial meltdown but why would America’s startups now receive a quarter of the investment they got in 2000, when seven years ago the total pool of money available for investing was already a third higher than it was in 2000?

One reason is that it’s so much cheaper these days to get a startup off the ground. Data from Dow Jones VentureSource appears to support that notion, with the median size of venture capital rounds decreasing over the past decade:

New Funding Models

Luckily, innovation today isn’t occurring only among startups. It’s also happening in the funding models that help create those startups. Accelerators and crowdfunding are elbowing the fat boys of venture capital aside.

The success of the Pebble watch, which took in a whopping $10.3 million on Kickstarter is a perfect example of how venture capital is being complemented by new approaches propelled by social media.

As Bloomberg reports, the creators of Pebble raised $375,000 in angel funding but when it came to raising another round, Pebble was roundly rejected by venture capital firms that didn’t want to risk betting on a hardware startup.

Accelerators are also booming. So much so that Jeff Levy, an entrepreneur and investor at Lamberts Cove, believes that an accelerator bubble may be forming. Levy should know, in 1999 he founded eHatchery, an Atlanta-based precursor to today’s accelerators.

But Levy agrees that accelerators such as Y Combinator:, 500 Startups: and Kicklabs are helping spur innovation while making significant improvements in the incubator model, including funding many companies at once and investing small amounts - $20,000 or so - in their ideas.

Venture Capital ≠ Innovation

So does less venture capital mean less innovation? Depends on who, and how, you ask. A 2007 study of Dutch companies by the National Bureau of Economic Research found that venture capitalists had a positive influence on their portfolio companies' innovation strategy because they pushed their “capacity to assimilate and exploit new knowledge.” (PDF).

But a 2008 study by professors Masako Ueda and Masayuki Hirukawa, entitled Venture Capital and Innovation: Which Is First?, concludes that venture capital does not directly stimulate innovation.

So can these new funding models help spur innovation? Absolutely, judging by the 68,929 people who decided to back Pebble. You can bet that the big watch companies are now cooking up a similar customizable watch recipes.

And how about British entrepreneur Piers Ridyard, whose innovative Nifty MiniDrive has already received $384,319 in funding, rendering him speechless 

Y Combinator, meanwhile, has funded such innovative startups as Dropbox and Airbnb:, the latter just recording its busiest night with 60,000 concurrent guests.

All of these innovative products and services would never have seen the light of day if they had to rely on traditional venture capital funding.

Accelerators and crowdfunding have improved the odds by spreading the risk of investing over many startups and investors, respectively. Could this hors d'oeuvre approach to venture capital help keep innovators properly fed? I’m betting dinner on it. 

Silicon Forest, Silicon Prairie, Silicon Beach, Silicon Hills, Silicon Sandbar. Nice ideas, all of them. But let’s get real. Startups anywhere outside the two major tech hubs of Silicon Valley and Silicon Alley have even more trouble attracting serious venture capital than they do finding a food truck with a decent bulgogi burrito.

Location Still Matters

It’s a central paradox of our time. The Internet and all its associated machines and gadgets enable anyone to be connected to anyone else -anytime, anywhere. But startups located anywhere other than a high-tech center may as well be pitching for investment in the Silicon Taiga. (Yes, there is one, don’t ask where.) Because relationship networks and personal contacts still matter.

Judy Sindecuse, CEO and managing partner at Capital Innovators, a startup accelerator in St. Louis, is trying to crack the code. Her organization runs a 12-week mentorship program for promising entrepreneurs in the St. Louis area and provides them $50,000 in seed funding. But then comes cap-and-gown time - and the hard part for Capital Innovators graduates: attracting real investment from bigtime VCs on the coasts.

That experience is consistent with research conducted by Aziz Gilani, a director at Houston venture capital firm DFJ Mercury. Last year, Gilani ran a study of 29 North American accelerators for the Kauffman Fellows program. He found that 45% of them produced not a single graduate who went on to raise venture funding.

Getting Past the Flyover Syndrome

“We’ve been very successful in our follow-on seed funding,” says Sindecuse. “We’ve had 13 companies graduate from the program and we’re somewhere between $7 million and $9 million in follow-on funding for our grads. But that follow-on money has come primarily from local angels and high-net-worth individuals in our network. What I need to solve is the A round of institutional venture funding.”

One plank in her pitch: it costs less than half as much to buy into a company in St. Louis than it does in Silicon Valley. She just has to convince the big-money folks that there are smart founders with promising companies around the U.S., not only in the graduating classes at TechStars and Y Combinator.

In the meantime, Sindecuse is working to develop a strong local investor community that can support companies coming out of Capital Innovators. A group of high-net-worth individuals in the St. Louis area recently banded together to create a seed stage fund called Cultivation Capital. The fund has promised at least $1 million over the next year to Capital Innovators grads.

Two Capital Innovators companies that have taken decent follow-on seed rounds are LockerDome, a social network that connects sports fans and athletes, which raised $2 million after over-subscribing on a $1 million round and plans to raise between $5 million and $10 million in the next year; and JBara Software, which makes customer-management software and raised $250,000.

The Missing Piece

But Sindecuse admits that the series A venture capital round “is still the missing piece and is something our region has always struggled with - building a network with the tech centers on the coasts. We have the local component nailed but getting that big round of capital is the next piece of the puzzle.”

If she can actually solve that puzzle, she’ll be one of the first to do so.

St. Louis image courtesy of Shutterstock.

StartUp Academy’s current class consists of 21 students culled from 779 applicants from schools like Duke, Harvard, MIT, Princeton, Stanford and USC. They’ll spend nine months in full-time or intern-level jobs at companies in the Bain Capital Ventures portfolio, taking time out to attend events and meet startup founders. Proselytizing for the 2013 class begins in the fall.

StartUp Academy is the brainchild of Ajay Agarwal, managing director at Bain Capital Ventures. “I spent eight years at a startup in Austin, Texas, called Trilogy,” he tells ReadWriteWeb. “Trilogy grew from zero to 2,000 people and $300 million largely on the back of college recruiting. The CEO was a huge believer in hiring people only from college. He felt that the risk-taking and out-of-the-box thinking and the feeling that you can do anything - that trumped the fact that they had less experience.”

Missionary Zeal

While the strategy worked for Trilogy, Agarwal notes that for most startups, serious college recruiting is cost-prohibitive. A startup might spend hundreds of thousands of dollars on aiplane flights, on-site interviews, career fairs - and end up with just one whiz kid from one campus. Then it would have to pay him an immense salary to pry him away from the gravitational pull of big competitors like Google and Facebook.

“So we said, why don’t we run the program? We can go to these campuses across the country on behalf of our portfolio, find great kids and match them up with our companies.”

The recruitment process is intense, almost missionary in its zeal. “We spend two weeks on each campus to really understand who are the best students, what classes are they taking, who are the profs and TAs, where are they hanging out. We really take the time to get to know these kids individually and understand what they are looking to do next and what is the right startup for them.”

Ideally, Agarwal says, StartUp Academy graduates will help recruit future classes and “become evangelists for the program.”

A Window Into Smaller Schools

StartUp Academy isn’t targeted only at institutions like MIT and Cal Tech. It also hopes to find smart students at smaller schools who might once have ended up running a database at the local Allstate office. “If you go to the University of Waterloo in Canada, how do you find a startup in Silicon Valley to join?” Agarwal asks. “That is an impossible challenge. So those kids end up going to a big tech company or consulting or banking or some other path, because those are the companies that recruit on campus. StartUp Academy is creating opportunity for these kids to go directly into a startup.”

It’s not a philanthropic enterprise, of course. And Agarwal is candid about the returns for StartUp Academy. Luring talented young workers will boost the strength of its current portfolio companies and may convince hot startups now in the market for investment that they should work Bain Capital Ventures because it can help them find good employees.

“Third, these kids in StartUp Academy will go on to start companies and this gives us an opportunity to build a relationship with them earlier in their career. Over time that will yield fruit for us.”

Africa has most of the elements required for technology innovation. What it doesn’t have is a startup culture where smart young entrepreneurs can grow their ideas into companies. So Mbwana Alliy is creating the Savannah Fund fund to help them.

Alliy is managing partner of the Savannah Fund, a $10 million fund that will soon begin investing in technology startups in East Africa, including Rwanda, Tanzania, Uganda and Kenya. 

Operating as an accelerator, starting in September it will recruit two classes of five startups per year. It will seed them with $25,000 each, connect them with mentors and fund successful graduates with follow-on rounds up to $500,000. The Savannah Fund will take 15% equity in each of its companies.

“What I love about Africa is that it’s all greenfield opportunities; it’s all new infrastructure here,” Alliy says. “My 3G connection in Tanzania is better than what I get in San Francisco. But is there the same startup mentality and excitement here?”

A Different Valley Culture

It’s a rhetorical question. Alliy is well aware that East Africa is a lot closer to the Rift Valley than Silicon Valley. But he also knows the region has all the ingredients required for technology innovation. It has intellectual capital - two-thirds of the population are under the age of 30. It has very wealthy people with money to invest. It has fast-developing infrastructure. And it holds huge opportunity for startups that hit on a good idea. A five-year-old mobile-money company called M-Pesa has 15 million users in Kenya alone (more than half the adult population) and processes a quarter of that country’s GDP.

While East Africa may be far from Silicon Valley, the Savannah Fund has close connections to it. Alliy went to Stanford and lived in the Valley for seven years. He’s worked at startups, at Microsoft and at San Francisco accelerator i/o Ventures.

Savannah Fund co-founder Paul Bragiel is a Silicon Valley serial entrepreneur and co-founder of i/o Ventures. Savannah’s funders include Tim Draper, Yelp co-founder Russ Simmons, Dali Kilani and Roger Dickey of Zynga and Dave McClure of 500 Startups, all of whom will spend time mentoring Savannah Fund startups.

Hoping for Local Money

Alliy hopes to build a startup ecosystem that will one day include significant amounts of local money as well. “There are quite a lot of rich people in Africa now and they are interested in venture-style investing,” he says. “We can help extend that runway for our companies and have that next level of investors locally. But we have to convince these rich locals that they should invest in tech rather than, say, real estate, where they can double their money in a year or two. In tech, it’s a longer horizon but the potential for much bigger returns is there.”

No continent knows “the curse of potential” better than Africa. But with a lot of hard work and a little luck, the Savannah Fund could help finally turn Africa’s tech opportunities into reality.

Lead photo courtesy of Shutterstock.

Blame Mark Zuckerberg. Since he invented Facebook in the third grade (or so it seems) high-tech investors have been throwing more and more money at younger and younger whiz kids. Older entrepreneurs may not like the trend - but it shows no sign of slowing anytime soon.

This is not to say that angels and venture capitalists are biased against older startup founders. They’re not. This is to say that investors are biased for younger startup founders. It’s a distinction VCs are quick to make when you quiz them on the topic. Although, in practical terms, it comes to the same thing. More investment for young founders means less money left for older founders, because there’s only so much investment cash to go around.

“Historically in IT, the hottest sector always absorbs 30% to 40% of the money,” says Paul Kedrosky, a senior fellow at the Kauffman Foundation who focuses on entrepreneurship, innovation and risk capital. “Mobile, local, social is gaining a good chunk of VC money at this time and that puts older entrepreneurs at a disadvantage. There’s no question.”

Young Entrepreneurs, Young Companies, Young Customers

The balance of investment has tilted toward young entrepreneurs, Kedrosky explains, because the markets that investors are most excited about are those that attract young customers.

“They’re essentially scratching their own itch,” Kedrosky says. “You’re getting 20-year-olds saying, ‘I wish I could do XYZ,’ so they go out and get funding to do XYZ. Which is different from someone in his 40s like me going out and trying to do it, saying, ‘I have friends who tell me their kids are interested in this.’ That doesn’t work.”

Investment patterns follow cycles, and one day it could circle back to older entrepreneurs. But right now the cycle is being pedaled by young people, and it’s gaining speed. The No. 1 choice of career among Stanford MBAs last year was to go into business for themselves. A record 16% of the class of 2011 chose to start their own companies at graduation, more than the previous peak, which was 12% during the dot-com boom.

Youngsters Hit the Accelerators

Another driver of this cycle is the popularity of startup accelerator programs. Investors love them, young entrepreneurs love them - and they’re really not an option for older people.

“Accelerator programs tend to be dominated by 20-somethings, and lots of those companies are getting funding now,” Kedrosky says. “But these programs are like summer camps for entrepreneurs, and that’s a luxury you don’t have at 40 or 50.”

It’s a slippery slope, this rush to fund young startups. If investors decide that only 20-year-olds can build companies that work for other 20-year-olds, will they one day conclude, say, that only women can build companies for women? The short answer to that question is “Yes”. VCs have a notoriously strong herd instinct.

The long answer is “Maybe”.

“Should a 40-year-old not focus on a social media or mobile startup? If you believe you can actually give entrepreneurs rational advice, yes, that would be a rational piece of advice for an older entrepreneur,” Kedrosky says. “But that’s the thing about entrepreneurs - you can never tell them what not to do.”

Image courtesy of Shutterstock.

Abandoning Bootstrapping

Social coding site GitHub was the poster child for the bootstrapping movement, and it was proud to be fighting the system. One of its founders even passed up $300K and a steady job at Microsoft to start the project. Within a year, the company (which bills its code-sharing platform as “Wikipedia for developers”), had made itself the leader in collaborative development, with a growing staff and a profitable ledger.

After a few early stumbles, GitHub has remained securely in the black and continued to build, so the announcement that GitHub was seeking financing from Andreessen Horowitz came as a bit of a shock. Unlike Yammer, which had a good product but faced a crowded market, GitHub really didn’t need the money to continue its climb. So why would a successful company with no one on its tail take the money now, when everything was already rolling just right?

GitHub’s official blog post put it this way: “Because we want to be better” and “the resources of Andreessen Horowitz can help us do that.”“ That’s a bit vague ("Who doesn’t,” and “Duh,” respectively). In the end, the deal boiled down to “fit,” which GitHub mentioned, and “a whole lot of money,” which it didn’t.

The Fit

Marc Andreessen is not Henry Kravis. He’s as concerned as anyone with turning a profit and justifying valuations. But at heart, he remains an open-source geek who wants to build things. To that end, he’s invested in enterprise technology companies that play in the same sandbox as his own development efforts. It’s easy to see GitHub sitting alongside other Andreessen Horowitz businesses such as snapLogic and Science Exchange (both of which attempt to manage crowd-sourced components in their own ways). And it’s a pretty good guess that Andreessen already uses GitHub.

Since GitHub is already profitable, Andreesen won’t have to try to fix anything, and GitHub won’t have to worry that he’ll try. His presence on the board will likely be focused on guiding GitHub’s growth efforts, and as VCs go, Andreessen is a pretty sympathetic heavy. He also brings a lot of experience to the table, particularly in the realm of partnerships.

The Money

$100 Million is an awful lot of money - probably enough to fund GitHub’s current staff for a decade. It will certainly help the company branch out into more innovative businesses. But even if GitHub squanders every penny, it has successfully placed a $750 million price tag on the business. Andreessen will sit on the board, but that’s hardly a bad thing to a company whose founders clearly idolize the man. The founders retain control, and they’ve gained a very strong voice with a vested interest in keeping that valuation high in future rounds of funding.

So in the end, it’s the best of both worlds. GitHub didn’t sell out, but some day, if and when the founders decide to, they’ll be able to do it in style.

Lead image courtesy of Shutterstock.

The top startup accelerators in the world - programs like TechStars and Y Combinator - receive a couple thousand applications for just a handful of spots each session. It’s harder to get into one than Harvard or Stanford. So how do you do it?

You could Google “how to get into a top accelerator” and see what advice you find. Or, better, you could pick the brain of a recent graduate. Trouble is, those guys are busy trying to grow their companies. They don’t have a lot of time to sit down for a chat.

So, we arranged a meeting with Dave Bisceglia, cofounder and CEO at highly touted mobile gaming startup The Tap Lab, which went through TechStars Boston last year and was a finalist at MassChallenge, the world’s largest startup competition. Tap Lab’s first game, Tap City, is now available free on Apple’s App Store. Bisceglia informally coaches other startups on how to win entry to a top accelerator. He offered the following tips:

1. Show Capacity for Traction

“The most important thing is traction,” Bisceglia says. “These programs want to see that you can accomplish a lot leading up to the program. When we were applying we met with the folks at TechStars for a first interview, with a second interview a few weeks later. We were determined to show them what we could do between that first and second interview and we accomplished so much in those few weeks - just two guys in a basement with no money. They were blown away at TechStars. It’s all about demonstrating traction and showing you can get things done.”

An accelerator session lasts only a few months, so programs look for applicants with the brains and ass-busting ability to achieve product in that period. They don’t want to waste their time and money on people who will stumble to session’s end with a half-baked idea.

“These programs want teams that are poised to put what an accelerator brings to the table to good use. For instance, TechStars is now giving $100,000 to every startup it accepts, so you have to be prepared to use that money to get traction for your business by doing things like bringing on talent during the program.”

2. Friend the Mentors

Every accelerator has a list of its mentors. These lists are public. Bisceglia tells the startups he consults to get hold of the list for accelerators they’re targeting and talk to the mentors.

“Try to get in touch with those folks before you apply and gauge their interest in your business. If you can get someone who’s actively involved with the program to be a champion for you while you’re applying, that will drastically increase your chances of being accepted.”

Before he applied to TechStars Boston, Bisceglia looked through the TechStars mentor list for people in that city’s gaming community. He connected with several and they helped him craft Tap Lab’s pitch and application.

“It also didn’t hurt to have their names on our application as friendly, unofficial advisors,” he says. “And since then those folks have become formal investors and advisers in my company.”

Tap Lab has $550,000 in funding, with lead investment from one of its TechStars mentors.

3. Build a “Fire on the Horizon”

Before you apply to an accelerator, try to arrange some event that will get the attention of the admission committee. Accelerators these days are looking for viable companies - startups with the potential for an exit in the near future, not five years down the line - and if you can show that you’ve got more than an idea on a whiteboard, it will greatly boost your chances.

“As corny as it sounds, we had a fire on the horizon,” Bisceglia says. “We scheduled a product launch at South by Southwest for the week TechStars was scheduled to start - and we told them that if we were accepted we couldn’t make the first week of the program because we had this scheduled product launch. They loved that. It demonstrated that we were a moving train and that we’d be able to really ramp things up once we started in the program.”

A lot of companies applying to accelerators these days have already built a product or raised a seed round or both. That’s your competition. If you want to stand out, you’d better have more than vaporware.

4. Ace the Application

A great application is an obvious element of success. But what makes a great application? Bisceglia says it’s vital in the video portion to demonstrate a couple of qualities, including your well-rounded startup team and your passion for your product.

“The team component is very important. Programs want to see diversity in skill sets among the founding members. They want to see in the video your personality and that you’re passionate.”

Also critical is what you don’t put in your application. Don’t put in everything.

“The written piece is very much like a college application,” Bisceglia says. “They want a quick pitch of your company. A lot of people get caught up in jargon and the weeds of their product. You have to really boil it down so your pitch is clear, concise and compelling.”

Once you’ve written your application, find a friendly investor or VC and ask for a review. They’ll find the pain points in your business and ask you about them. This will prepare you for the interview portion of the accelerator admission process.

You can also reach out to people who have been through the accelerator program. Just don’t try to get time with recent graduates. They’re too busy, as mentioned above.

“If you get a vote of confidence from an alum, that’s to your benefit,” Bisceglia says. “The trick is to not reach out to the very last class, because those guys are crazy trying to raise a round and trying to impress investors, so it’s very difficult to get their time. You really have a window of two to three months once you graduate from the program to get the attention of investors while you still have that glow.”

Play your cards right in your accelerator application and someday that could be you.