1) Expect the angel and seed stage market to continue to stay hot. Newly wealthy Facebookers will likely contribute massively to early stage companies, which means building relationships with companies early and actually rolling up sleeves to add value will be a must for investors. If you're just money, you are toast.

2) Facebook will be hungry for growth in its ad business, and since it is running out of internet connected humans to connect to, it will need tools to make more out of each person. This will be a huge boon for companies like 33Across that monetize social data without being creepy.

3) It will get much harder for Facebook to recruit talent, since the promise of the pre-IPO stock pop is gone.

4) You'll likely see Facebook make a move to diversify revenue by breaking ground on a big new area. I'd say it has to be payments, because knowing who your friends are gives them a natural advantage in peer to peer. That data can also be used for fraud prevention because it's pretty hard to fake a person on Facebook compared to the normal behaviors and extended network of others.

5) Stories of how much money people made as early employees will trickle down to students, who will be less likely to join big companies and more apt to start their own businesses. Recruiting for banking and consulting will become that much harder.

6) The newfound wealth created by Facebookers will spur innovation around impact businesses in the sustainability, green, and social good areas--because if you don't need to work, you might as well work on something that makes the world a better place.

7) Expect more competition to Facebook. As crazy as it seems, the truth is that companies tend to take less risk, innovate less, and lose key employees after an exit. Entrepreneurs. May look to figure out what's next now more than ever before.

8) Increased regulator scrutiny of Facebook now that it has to make more disclosures about how it is doing and its methods of making money.

9) Investors will be looking at what Facebook does with it's cash. Facebook Ventures? Bigger acquisitions?

10) Goosed VC returns. Tens of billions of dollars of return should help VC returns a bit, but it will wind up widening the gap between the haves of the top quartile and the have nots of everyone else.

How do you price a round?

Its one of the most often asked questions and yet I've never seen a great answer given. It seems to me that the most important factor in pricing your round isn't your progress or your idea. It seems to come down to two things:

1) How much do you want to raise?

2) Supply and demand of capital willing to invest in your company.

The second is pretty obvious, but what about the first? So the more you want to raise, the more your company is worth? Kind of, actually...but how much money a team gets has to do with a number of factors that reflect things like trust in the team, risk, etc. So instead of pricing that into how much a company is worth, they tend to price it into round size.

More simply, the better the team, the lower the risk, and the higher the expected outcome, the more you're going to be willing to give a team and the longer you'll let them go until their next fundraising.

Sometimes, this also relates to capital requirements of what the team needs. For web development, usually it's pretty much the same across the board, but if you're making jewelry in China, it's going to be hard to get much done with a 500k seed round.  Usually, teams are asking for enough money, plus a cushion, to get to some milestone roughly 12-18 months out.

So, ask for more and you're get a higher price IF the investors think you can handle it and you need it.

Generally, each round is going to set you back between 15-30%. That means investors are going to buy that much of your company at a time. It's a function of a few things. That means that founders as a group will be right around 50% ownership after two rounds. It means lead investors can get to 10, 15 or 20% ownership depending on whatever math they have that makes their own success model work. That's just roughly the equilibrium we've come to in this world.

Let's say the default, for simplicity's sake, is to take 20% of every round. More often, its probably closer to 25%, but since this is a blog post, I'll try to look more entrepreneur friendly. The question then becomes whether or not there's any significant reason to move off of that default.

Note that, to even get venture in the first place, you are special. Your team must be awesome and your idea must have huge potential. Getting less dilution than standard means that you have to have made fantastic progress, have a world class team, etc. way above and beyond what normally gets funded at this stage.

The other way to move that number is much more simple-- generate more demand for the round than there is supply of allocation. If two million of money wants in to this deal and they're raising one million, it's unlikely that me and my fellow investors are going to get the chunk of the company we normally get. If you're not fully subscribed, though, then I'm probably going to stick with a more normalized price since I'd rather not negotiate against myself.

Just so you see what the results of dilution and raise size come out to be, here's the 2nd grade math in a chart:

One note is that I'm talking about equity here--but no matter what kind of deal you strike, there's usually an equity equivilant.  Some people think that by raising a convertible note, they're not pricing a round.  Bullshit.  Whatever cap you put on the round, that's essentially the price, because no one would bet on you unless they thought you could beat the cap--so its essentially equity.  Uncapped notes, on the other hand, leave the investors and the entrepreneur misaligned.  I'm not exactly hoping for near term success because my price isn't locked in.  Investors should be able to lock in a price that reflects the risks at the moment they pulled the trigger.  Call me old fashioned.

So, there it is.  It's not that complicated, really.

I'll bet you don't know where the Center of NY's Tech Community and Center of Creativity is.

Give up?

It's in the Financial District--right at 55 Broad Street.  It says so right on their website.  In fact, it is "well-known internationally as the original home of New York's technology community."

I'll bet you didn't know that--mostly because it never was.  Back in the late 90's, a lot of money and real estate brokering went into trying to make it so, however.  Names like Sun and Cornell (ironically, given the new tech campus) were brought in to try and tech-ify NYC's downtown area.

Unfortunately, there wasn't much actual tech being built in 55 Broad.  Sun's space was for it's customer assistance unit and Cornell just had a demo space patched into a supercomputer back on campus.  There was a computer training lab run by a company called Prosoft, but that's like having an Apex Tech and expecting to be the next Detroit. 

Despite the attempts at seeding things way downtown, Flatiron and Soho is where tech startups grew, just like today.  So why didn't it work?

What you had with 55 Broad was a case of trying to thrust a building into the community without necessarily seeding and connecting the community to the building.  Just because you put up a structure doesn't mean it's going to sprout a whole innovation ecosystem.  You need a lot of other elements crosspollinating. 

One of the reasons the NYC has such a vibrant ecosystem in place for startups is because of its seemingly more "permanent" community structures--not the buildings themselves, but the fulltime people and dedicated money that have a stake in the future of innovation of NYC.  These are people whose business it is to support startups.  

VCs and fulltime angels bring a lot more than just money to the communities they invest in.  There was never a shortage of money in NYC--and there really isn't a shortage of money in any big city.  You can get just about any wealthy person to part with some small portion of their wealth to put into risky investments, but these people don't contribute back to the ecosystem.  They don't have a stake in it--and by not actively putting themselves out there as a source of capital, they're not in the information flow.

The currency that VCs deal in that's just as important as any other is information.  Like pollinating bees, VCs bounce from meeting to meeting interacting with dozens of startups per week each.  They carry with them information about patterns of success, pitfalls, best practices and trends to look for.  They have a huge information advantage that startups can tap.  On top of that, they tend to be the locus of innovation networks.  It's no accident that the people who give out money have the largest networks of people floating around them.  It connects them to all the companies they've met, invested in, the bigger companies that could acquire their companies and hundreds if not thousands of employees that have worked within their portfolio.  They also meet a ton of press.  Government and academic professionals also seek them out to get connected to the startup ecosystem.  If you want to connect to an innovation community, there isn't a better place to start than someone who invests in it.

This is effective because, without a ground war, it's tough to start an innovation revolution.  It needs to go house to house--founders and employees getting matched through individual e-mail intros, deals happening over handshakes, and startups getting recruited into your ecosystem one at a time.

When communities lack a critical mass of fulltime investors, you get a lot of inefficiency.  Ideas get poorly vetted because the funders aren't current on tech trends.  Companies can't find the partners and employees they need.  It's not quite the same when you're putting government money to work supporting new companies.  Grants are nice, but they don't come with the expertise of investors who have worked with tons of startups before.

Plus, you lack for visible champions--which is the complimentary air support.  As much as a local community member might want to talk up a scene, the media always wants to follow the money.  Startups had been located in Brooklyn for years, but it seemed that once the idea of more money flowing here came about from my fund, the media suddenly had an interest in what was on the other side of the East River. 

I've come to appreciate how the same approach works with the physical spaces that have become startup hubs.  General Assembly is making a business out of fostering the community--and only because of that are they able to commit the kinds of fulltime resources necessary to create the quality and frequency of events that bring entrepreneurs together to learn.  When I was running what seemed like half of the events we had in the tech scene five years ago, I couldn't make nearly the kind of impact that a team working on it fulltime could.  Individuals running meetups have done a fantastic job helping the community flourish--but it's a major burden to find space, get speakers, and market your event when you have another job to do.  It happens and people do it, but it really helps when you have an organization focused on it as a goal.  Plus, that organization and the individual meetup organizers tend to find synergies around space usage, teaching best practices and crosspollination of speakers and ideas.

Techstars and other accelerators have also become major network hubs in the NYC ecosystem, bringing investors together from all across the country.  Brooklyn Beta will be accomplishing that same thing for the Brooklyn ecosystem.  I'm sure their Summer Camp demo day will be the first time a lot of VCs have set foot in the thriving outer borough. 

If the dreams of expanding the Tech Triangle footprint of Dumbo, the Navy Yard and Downtown Brooklyn are going to come true--and Williamsburg is to see continued expansion as its own supporter of tech, its going to need more of this kind of fulltime support from people who make a business of startups.  Just putting up buildings and spaces without enough fulltime support of organizers and investors won't do it.  That's what I fear when I see places like Berlin, Chicago, and Toronto putting on startup events--not enough anchors to make the whole thing stick and to turn the excitement into real opportunity. 

This also goes for lawyers and teachers, too.  Are your lawyers fulltime startup lawyers who do nothing but startup deals all the time or are they working on new companies as an exception?  What about your academic programs?  Is your business plan competition a fun thing you do on the side each year, or do you have real programs with fulltime staff dedicated to teaching full stack development and how to incubate real businesses?  What faculty member sees it as instrumental to their career to connect to the tech community around them to get in the flow of best practices?

So if you're checking off all the ingredients you need to build your own startup ecosystem, just count how many people you have whose fulltime profession it is to support the ecosystem through their normal course of business--not just a side gig or an economic project.  Get enough of those and you'll have your community. 

Fact: Thanks to the new crowdfunding legislation, it will soon be easier for any entrepreneur trying to build Instagram for Cats to raise $10 million than it is for an experienced investor to raise a fund to invest in the next 25 new businesses as well as support their growth with strategic advice, help with hiring, PR, business development, and connections to future capital.

In fact, thanks to increased scrutiny of investment funds in a post-Madoff world, this imbalance will probably get bigger and bigger.  The laws are written seemingly with the view that it's worse to lose your money from fraud than it is from your run of the mill poorly exacuted bad idea.  You know, because sometimes startups just simply don't make it [shrug] but you gotta watch out for those financial hucksters who are looking to take your money and run off to kick it in Fiji.  Trust me, if you lose all your money on your brother-in-law's Arizona tanning salon, it's not going to hurt any less than if you lose it in his seed fund.  (Hmm... tanning salon/seed fund combo...  Jersey Shore Ventures anyone?)

I would say something like, "You should see the number of complicated disclosures I had to had to pay a lawyer tens of thousands of dollars to put into my fund's legal docs," that is, if I could say anything about the fundraising status of any fund that I might have at all.  I can't tell you anything about it thanks to the SEC.  I can't put up my track record on my blog, which I'd happily do--whether I have any exits (even though it is theoretically public what I've worked on and who might have sold to a company that rhymes with hype) and how the other companies are doing.  I can't tell you about the... oh, I dunno, let's make up a number that doesn't tie into any living people, real or imagined... 25 people I've actually placed at companies as part of a message of how I help startups.

But crowdfunding investments in startups is the answer to all our worries in life, right?  It's a beautiful thing we're all supposed to get really psyched about--Main Street helping Main Street.

Until you realize that vetting and helping companies is actually really hard--or did you not notice all the news that venture capital as an asset class doesn't beat the market.  Only the people who do it well produce returns, and when they do, they trounce the alternatives. 

So, to recap, it's fine to let people who don't know anything about startups invest directly into them, but we're putting tons of restrictions around people with actual experience helping those people out and vetting the good ideas from the bad ones.

[scratches bald head]

16k+ Twitter followers, 5500+ e-mail subs a week, 6th most read VC blog, appearences on Bloomberg and CNBC and I can't use any of it to market any kind of financial product--but if I wanted to sell you a watch or build a video game, I'd be set.  Personally, I think it would be pretty awesome if all of the people who subscribe to my weekly newsletter could put $2000 towards supporting the early stage tech ecosystem in NYC.  At least it would be diversified across 25-30 companies--there's no such requirement in crowdfunding.  Who wouldn't want in on the next Union Square Ventures or First Round Capital funds?  I certainly would!  If venture funds could be supported by the local communities they invest in, you'd create a fantastic dynamic. 

Instead, you create a dynamic where it's actually easier for bigger funds to raise money from big institutions.  The big institutions are more visable--you know who they are.  You can get a list of the biggest pension funds and endowments and it wouldn't take that much legwork to figure out who manages their venture programs.  Or, as a bigger fund, you could hire a placement agent--someone who specializes in helping you raise a fund.  Placement agents, obviously, want to work with bigger funds because they get paid more to raise them--for the same amount of work.   If you're raising a few million, it isn't worth their time.

The investors for small funds are much more random and hidden.  They're pools of partners capital from hedge funds you've never heard off, family offices that don't maintain any kind of a web presence or some entrepreneur who sold some airport runway cleaning service in Latvia for like a billion dollars who now just jetsets around the world buying up soccer teams.  You can't exactly look those people up on Angel List. 

You also create an insider's game.  Want to know why there aren't more female partners at VC funds?  A huge number of the people who make partner create one by starting a new firm--Fred Wilson, Josh Kopelman, Marc Andreessen, Rob Go, and Josh Kushner all became partners when new funds were created.  Raising money for a new fund is harder than raising money for a new company.  At least startups have accelerators, incubators, etc. and now croudfunding sites.  For new fund creation, you essentially have to already be tied into existing networks of capital.  It's really not fair that I'm potentially able to get investors through my existing network for any theoretical entity that I may or may not be putting into place which I'm not allowed to talk about if I was.  Good luck doing it if you're not already tied into that world--which is a different world than just the startup ecosystem.  It will be a long time before you see diversity in this big money world because of the barriers to getting started--and if you don't get diversity on that side of the table, its going to be tough to get it on the entpreneuer side.  (Says the white guy...) 

I could, however, raise money for a Facebook-killer which I may or may not have the technical capability to build.

If there was more transparency into this world, and more liquidity in this end of the funding markets, I think you'd see the better fund investors rise to the top--just like you see in the startup world.  Lots of companies are getting seeded, yet a smaller percentage of them are making it to the next round.  They're failing faster and with smaller dollars.

This kind of quick vetting doesn't happen in the venture world.  The current structures create a scenario where you're incentivized to go big with a fund and it takes forever for big venture funds to fall apart--yet we potentially miss out on the dealflow of up and comers that we'd back to put our money to work for us.  If Mike Galpert, Frank Denbow, Amanda Peyton and Brad Hargreaves all had little kickstarted pools of money attached to them to invest, I'd back them, because they're smart, they get great dealflow.

Of course, that doesn't negate the need for people who do this on a fulltime basis at all.  I'm a believer that someone needs to lead a round, sit on a board, and go to sleep at night thinking about how they can help the companies they're invested in. 

Call me old fashioned.

It's true.  With the ascension of Kent Goldman and Phin Barnes to Partner, Christine Herron leaving to join Intel Capital and me starting Brooklyn Bridge Ventures, there are no longer any people at the Principal level.

Oh, did you think I meant something else?  :)  I just thought today was Salacious Headline Day in the VC blogging world so I thought I'd chime in.

In all seriousness, Kent and Phin are two of the most principled professionals I know in the venture capital world--and their promotions are well deserved after four years of hard work at one of the most principled firms I know. 

It's no accident that the Principal level, which--for a brief moment after I got promoted and before Christine got hired by Intel--had four of us, is now down to zero.  The Principal level at any firm is a bit of an awkward stepchild.  It's a little bit like adding "Interim" to a coach's title.  They're doing much of the same work, but there's something about public signaling that kind of makes others think they're on some kind of probation.  Is this person going to be here for the long run?  What kind of sway do they have internally?  Are they jockeying for position with someone else?  Not only is it not quite clear to the outside world but sometimes it isn't even clear internally.  Sometimes Principals can lead deals and sit on boards, sometimes they can't. 

Plus, you simply don't have the same economics--you're the rookie who is killing it but who isn't up for the fat free agent contract until they've got more years of service time.

When I first sat down with Josh back in September of 2009 to talk about joining First Round.  He told me that he already had three great people "on the bench" and there simply wasn't enough "playing time" as it was--so it wouldn't be clear how he could ever really get me into the game.  (Clearly I'm riffing off Phin's college ball analogies here.) 

That's what being a junior person at a VC firm is like--you do the best with the minutes you get.  That's also why the bar is so high for the kinds of folks that get hired.  In a way, you need to *already* be making an impact in the venture ecosystem, because if you're not an impact player, you're simply going to get lost in the structure.  (I wrote a post about how to do this a while back...)  That's why I'm not hiring any junior investment professionals.  There's no sense in drafting an impact player that isn't going to be able to fulfill their potential during their tenure because of the structure of the job.

As a Principal, you're always going to be in an uphill battle to make a name for yourself.  The paths that Phin, Kent and I took to becoming Partners were roads less traveled and statistically harder.  You've got a better shot at joining a VC firm's partner ranks as a successful entrepreneur than as a junior venture professional--and I think you're going to see less and less new Principal positions over time.

You'll still see analysts in bigger firms--people working on cashflow projections, market research, and being the "on the ground" folks showing up to every last startup pitch event to turn over every rock--but they're not going to be decision makers.  It will be clear that those are capped positions that get refreshed every few years like working at a bank.  It's a great role for seeing a lot of ideas and learning a ton for more experienced folks, but at some point, you're going to want to figure out how to gain the credibility to bridge the big gap between an analyst and a partner making the call and being a value added boardmember.

A couple of years ago, we used to have a Junior VC dinner in NYC.  Since then, Eric Wiesen, Mo Koyfman, Phin, and myself have become partners, Sarah Tavel and Mark Davis have gone over to the operational side, Melody Koh has gone off to grad school and Andrew Parker (undoubtedly the next partner promotion along with Thatcher Bell) went off (theoretically) to Boston.  

Is this the "Death of the NYC VC Principal" post?  Will Schlaf be the last one standing or will it be Tom Loverro?  We shall see, but the opportunities for those with too much experience to be an analyst seem to be drying up as more and more venture firms find that this "middle child" position isn't the most efficient use of talent.