A VC’s Breakdown of Early-Stage Funding

Great post by John Nesheim detailing early round financing of a startup.

Often when reading about the business of the web, we hear about the latest and greatest acquisition a la YouTube, reddit or del.icio.us, without hearing how they got there.

What happens when you’re site starts to take off? How will you pay for all those servers, switches and databases? Early on maybe you can bank roll it yourself with money from your 401(k), contributions from family and friends and maybe even that long lost class mate who struck it big in Web 1.0.

However, if you’re site really takes off, it’s likely you’ll require access to what I’ll call HLF-higher level funding. That’s where the VCs come in.

Not only can VCs provide the capital required to keep your site humming. Often they can provide management experience, contacts and insight that an early-stage startup may be lacking.

As far as determining the value of the company and what portion should be allocated to VCs (in return for their investment), John points out, its crucial to back into your early round funding valuation. Not only does this help you keep tabs on the (hopefully) growing value of your company, but it also helps prevents a young company from giving away too much in response to the panice which may result from a capital crunch.

So What? Clearly building your own company isn’t as simple as having a great idea and the programming chops to build it. Having a working knowledge of financing or at least the advice of someone who does is crucial as you build your company.

Tags: VC, funding, financing, YouTube, Del.icio.us, reddit, startup

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