High Price Points:
Priced too high and you may simply price your product out of the market.

Low Price Points:
Is there an issue with too low of a price point?  From a consumer perspective is there a hassle barrier to purchasing?  Is it worth it to a consumer to spend their time going through the process of paying $0.01?  Is this true for $1.00 or even $10.00?  Especially if the purchase process is involved.  I am not talking about itunes one-click action.

At this price point, shouldn’t it just be free?

Assuming that this data is accurate, his conclusion is false.  Key questions to ask:

1. If Wal-Mart out-competed startups, wouldn’t this affect the survival rates of startups?
2. What is the impact of taxes on startups.  The more you tax people, the less money they have to reinvest in their business.  This would include all tax rates and associated fees.
3. How is the increase in regulations affecting the ability of startups to get off the ground and execute to their business model?
4. What about our educational system?  Are they as active promoting entrepreneurship as they have in the past?

What do you think?

If you can sell X of something at $1.00 you could probably increase that by 100X if it were free.  Free allows for viral activity.  If someone where to have to pay to see or share a video on Youtube, how viral would they have been?

What are your costs?
Zero.  For content distribution.  It is estimated to cost $0.25 per hour of streaming video this year, going to $0.15 next year, and even lower the following year.  Video is one of the most expensive costs for content distribution.

Hosting costs are rapidly decreasing as well.  With the advent of the Cloud companies are paying as they go.  It is now possible to run company without a dedicated server, that only costs the company based on the actual usage and those costs are decreasing as well.

How do you monetize free?
With ancillary products and services.  Just like musicians who are making money off concerts and merchandise, you will have to find a way to do the same for your business.

If you can’t charge for the data, then charge for something directly related to it.  What that might be only you can answer.

Based upon the post from yesterday regarding whether the VC model is broken, the above matrix determines what each company will need to exit at should sell to return a 20x for their investor at different equity stakes.  Since the ownership amount is not public there are two examples 33% and 50% of the company. Though, with some of the above companies that have received a number of different rounds of investment, the percent of the company owned by investors might be a lot more than 50%.

Do you think these companies could possibly see numbers like these?  Admittedly, these startups are shooting for the moon (except Robot Co-op?).

The above data was provided by CrunchBase and we cannot attest to its accuracy. This exercise does not take into account liquidation preferences, downrounds, or other factors.

This pertains to early stage tech startups, specifically Internet and Software companies.  This doesn’t apply to retail, manufacturing, healthcare, biotech or energy companies - among just a few.

Why the model simply doesn’t work for tech startups:

a startup is looking for capital and approaches a VC who wants to invest $3M for 33%

VC will be looking for a 20X return

the startup will have to sell for $180M to see that happen

How many companies are ever going to see that level of exit? 0.1%? 0.05%? Less?  It doesn’t even look that much better for a “low level” investment of $1M by a VC (still assuming a 30% stake).  An exit with a $1M investment will still need to be a minimum of $60M…

That is still a low percentage of exits.  There are a lot of exits happening for $5-20M.  If you receive an investment of $1-3M you are essentially pricing your company out of the market.  This is a numbers game, so know the numbers.

A maximum investment of $300,000 will allow a profitable exit for all parties at a $20M exit.

Of course, this model changes if VC (or any investor) is looking for a lower multiple or if they take a greater percentage of the company.  One of the key calculations entrepreneurs need to make when starting a company and looking at taking on investment is what is the likely exit scenario for their business and how much equity and control are they willing to give up.

…

3. If you want advice, ask for money. And visa versa. If you go asking for money, VCs give you an earful on how to run your company. If you go asking smart people for advice, eventually you’ll do well enough that those advisors will refer you VCs. This is assuming that you get good advice and follow it. Here’s more on the value of advisors.

4. Money has karma too. Too much money can actually kill a startup because it raises expectations about what kind of return will be possible. Big amounts of money are like drugs. They’re addictive. But it means you can’t go after small markets, even if you can build a highly profitable company. Going after niche markets is a problem because early stage investors know you’re not finance-able by later stage investors, so they won’t fund you. It’s game theory, looking back from the end. As for being lean, Sequoia Capital has taught us why it’s important.

…

7. Negotiate from power. Reason follows. Investors will make all kinds of arguments as to why they need a multiple liquidation preference, one-sided no-shops, big option pools, board control and other clauses. But often these arguments will make no sense or ring hollow. Ravikant’s recent favorite comment came from an investor who wanted board control because he “wanted to be heard.” Usually these nonsense arguments go away if you have multiple term sheets and a “hot deal.”

8. It’s not smart money. It’s wise money. Wise investors see long-term potential. Entrepreneurs often choose VCs based on how well the VC knows the company’s industry or has a specific skillset (like good at business development or understands the technology.) The entrepreneurs think that this is what “smart money” means. But really, the job of a VC is not to figure out your industry better than you or to fill a gap in your team. Their job is corporate governance — financing issues, recruiting, firing a CEO (or possibly you!), or mergers and acquisitions. These issues require wisdom - understanding the long term consequences of your actions. As such, what you’re really looking for is better described as “wise money.”

9. Vesting is good for founders. If you keep board control, you won’t have to worry about your investors firing you. However, you still need vesting in case one founder drops out or doesn’t scale and the others are left building the company. If 25 percent of the company is owned by a founder who had to be removed in year one, the company is effectively a zombie.

10. Hire founders. Get people who are as motivated as you are to join you.

RSVP: http://upcoming.yahoo.com/event/2823976/

Mobile application industry is moving and shaking! Apple has proven that mobile applications can not only be highly monetizable, but that the really good ones can also become a phenomenon. A niche until Apple exploded it less than a year ago, the mobile app market will be worth $25 billion in five years, according to Juniper research.

The predictions state that games will remain as the most downloaded and most revenue-producing applications and multimedia and entertainment apps will contribute to the most value-added-service (i.e., subscriptions, premium events and additional content) revenues.

So, how do you benefit from this demand explosion in the complex mobile ecosystem? In this event, we are bringing together experts who will help you navigate the ecosystem as they focus on and address the following key questions:
•    What are the major shifts currently happening in the mobile ecosystem?
•    What does it take to create a successful mobile app?
•    How do you deal with the diversity of handsets, platforms and carriers?
•    What sales/distribution channel and pricing model should you use?
•    How do you sustain yourself in this competitive market? How do you grow?

Who will benefit from this event?
•    Entrepreneurs (and those waiting in the wings)
•    Companies leveraging mobile channel
•    Mobile app developers
•    Service Providers, Consultants and Analysts
•    Consumers and Prosumers

Whether you are a veteran in the industry, or an entrepreneur looking to secure your feet in this game, or someone who is providing services to the mobile ecosystem, join us for this discussion and be a part of this new evolving mobile world!

Keynote:
Chetan Sharma, Founder and President, Chetan Sharma Consulting

Speakers:
Brendan Benzing, SVP, Motricity
Dan Shapiro, CEO, Ontela
John SanGiovanni, Co-Founder, Vice President, Product Design, Zumobi
Sajal Sahay, Executive Director Marketing, Devices Innovation, T-mobile
Shiv K. Bakhshi, Ph.D, Principal Analyst and Founder, Mobile Perspectives

When:
Thursday, July 9th, 2009
6:00PM - 9:00PM

Where:
Courtyard by Marriott
11010 NE 8th Street
Bellevue, WA

Cost:
TiE Members: $10 (with dinner: $35)
Non-Members: $20 (with dinner: $55)

A special thanks Bing, Foster Pepper and Blue Box Group, our three event sponsors for making the entire event possible!  Nathan Buggia at Bing talked about how entrepreneurs can leverage Bing to grow their business, Will Orndorff of Foster Pepper spoke to the legal needs of the startup community, and Jesse Proudman of Blue Box Group shared their scalable cloud hosting services.

With their support, we were able to have Gist, Mpire, Evenues, Viafo and Twilio present to the audience of well over 200.  There were some great presentations, but there can be only one crowd favorite award.  This time around it went to Twilio.  Congrats to Jeff and Danielle!

Also, it was great having Seattle 2.0 and Seattle Lunch 2.0 as Media Sponsors.  Without them we wouldn’t have been able to get the word out as much as we did.

Thanks to Randy Stewart for the photos (more photos at the link):

Your's truly haming it up for the crowd

Nathan Buggia at Bing kicks off the party.

TA McCann, CEO of Gist launches into the product demo.

The crowd is busy twittering the presentations to the audience at home.

Darren Austin, creator of the iPhone App Amplitude helps us choose the crowd favorite.

all photos are courtesy of (CC) Randy Stewart, blog.stewtopia.com.

If you want to see the online chatter about the event last night, feel free to check out the Twitter stream.

Quick details:

Starts at 6pm
150 drink tickets will be given out on a first come, first serve basis

A quick thanks to our sponsors, without whom this event simply wouldn’t happen.  Be on the lookout for great free gifts during the event from Bing (cool swag), Blue Box Group (iPhone 3GS gift card), and others!

With a great lineup of very cool startups, we should see some exciting new technologies and services:

During the event, we will be hosting a used cell phone drive.  So please be sure to bring your used phones.  The phone drive is for an art project as well as charity.

Lastly, a special thanks to the Microsoft BizSpark program.  They were generous enough to move their event also scheduled for this evening to July 8th.

Does this same relationship apply to application developers?  If so, and these applications are limited in size (and revenue) does that mean that these companies won’t work for Angel and Venture Capital investment?