[INFOGRAPHIC] Key Sources for Digital Investment Capital

In case you have not seen the very well done LUMAscapes by Luma Partners, I thought they were worth sharing, as they provide a great visual shapshot of the digital ecosystem.  As an example, the graphic below summarizes the key players for digital investment capital.

Click here to see a larger version of this graphic at the Luma Partners website.  I would add that this graphic was prepared prior to the passing of the Jobs Act, earlier this year, and doesn't include the key players in crowdfunding.  But you can reference the key players in crowdfunding, on my previous post on that topic.

Be sure to visit the Luma Partners website to see their other LUMAscapes, for key players in display advertising, search marketing, online video, mobile, social media, e-commerce and gaming.  Thank you Terence Kawaja for preparing these, as I find myself referencing them all the time.

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Chicago's Startup Scene on Fire - Startups Relocating from Coasts, Coastal VCs Investing in Record Numbers

When I started iExplore in 1999, Chicago was jokingly referred to as a "flyover city", as the big venture funds in Boston or Silicon Valley would fly back and forth to each other looking at deals, ignoring Midwest startups altogether.  And, even worse, they would insist that any startup that wanted their funds, would need to relocate their business to their city in order to close a financing (which many aspiring entrepreneurs did, having no other choice), in order to leverage their expertise and tap into their local ecosystem. 

But, that was a different time for Chicago, before it started to build a robust startup ecosystem of its own.  Angel investors organized themselves into networks, like Hyde Park Angels, Cornerstone Angels and Wildcat Angels.  Incubators like Sandbox, Lightbank, Tech Nexus, Excelerate Labs, Catapult and 1871 launched to help startups accelerate their growth.  The local universities like U-Chicago, Northwestern, Depaul, Loyola, IIT and UIC have done a better job of formalizing their entrepreneurship programs.  Built In Chicago, the Illinois Technology Association and the Chicagoland Entrepreneurial Center helped to make business networking more accessible for digital tech startups.  Venture firms like MK Capital, New World Ventures, Apex Ventures, OCA Ventures, and i2a Fund started to get more aggressive in their investing, looking at earlier stage deals.  The state of Illinois and the city of Chicago started to embrace startups as a salvation for their economic woes, including the launch of the Illinois Invest Venture Fund and a mayor in Rahm Emanuel that has proven his commitment to helping the startup community succeed.  In addition, this generation of entrepreneurs can now access tons of free mentorship, from successful proven serial entrepreneurs from the past generations, including many of the founders in the FireStarter Fund. 

And, let's not forget about the halo effect Groupon's meteoric rise had, in terms of putting Chicago on the map in a much bigger way and providing inspiration to the hundreds of startups that launched in their wake.  According to Built In Chicago, 128 digital startups launched in 2011, a 53% increase from 2010 and a 5x increase from the 25 startup average per year between 2004 to 2008 (before Groupon).  And, 77 of which successfully raised $1.45BN in capital ($972MM of which was Groupon).  Excluding Groupon, the $480MM raised was a 76% increase over 2010 and a 4x increase from the $109MM average per year between 2004 to 2008 (before Groupon).  With no signs of things slowing down in 2012, year to date.

More importantly, the coastal VC's are starting to take notice.  In the last couple years, we have seen substantial multi-million dollar raises by Activ, Analyte Health, Belly, Braintree, Cleversafe, Groupon, GrubHub, inXpo, Mu Sigma, Narrative Science, Singlehop, Sprout Social, Total Attorneys and Trunk Club, invested by major coastal VC's like Accel, Alsop Louie, Andreessen Horowitz, Bain, Battery, Benchmark, Bessemer, Digital Sky, Draper Fisher, General Atlantic, Greycroft, Greylock, Highland, Kleiner Perkins, Lightspeed, Maveron, NEA, Sequoia and USVP.  Chicago is no longer a "flyover city", it is frankly become a destination city for many of the big funds.

And, interestingly enough, the coastal startups are also starting to take notice of Chicago, with many relocating their businesses here to tap into our exploding ecosystem, talent base and lower cost of living.  Companies like Big Machines, Future Simple, MobCart, StyleSeek, Trunk Club, Vlinks Media and many of the businesses incubated by Excelerate Labs have all relocated from the coasts.  Even big companies, like Discovery Communications, have decided to locate their innovation efforts here in Chicago, given the exploding startup scene here.

To learn more about why this is happening, let's take a look at Trunk Club, the personal shopping site for men's fashion, led by their highly successful CEO, Brian Spaly, as a case study.  Brian has deep connections in both Silicon Valley, as a Stanford MBA graduate, and in New York, as the founder of the highly-successful denim e-commerce startup, Bonobos (which has raised $35MM by Lightspeed, Accel and Nordstrom).  Brian could have stayed in New York, one of the global epicenters for fashion, but made the deliberate decision to locate his business in Chicago, despite the appeal of Trunk Club's investors (USVP, Greycroft and Anthos) to stay in New York.  He told them "if Montgomery Ward and Sears could build successful apparel businesses in Chicago over the years, than so could Trunk Club".

When I asked Brian "Why Chicago?", here is what he had to say.  First, he had some personal reasons, like being closer to his family hometown of Ann Arbor, Michigan (Go Blue!!).  But, there were also some material business reasons, like the huge base of more-affordable, more-loyal, harder-working talent looking to get involved with hot internet startups in a city as large as Chicago.  As compared to locating his business in Silicon Valley, where he was one of many hot internet startups having to compete for talent with a much higher cost of doing business.  And, in addition to moving himself to Chicago, Brian is getting his key executives to relocate from the coasts to come work for him, including his COO who left his venture capital job at Greylock in Silicon Valley to help build Trunk Club in Chicago.  Brian jokingly said, "what other internet startup has raised $11MM in capital and is comprised 80% of Big Ten graduates and 70% women".

Brian also had some altruistic reasons for locating his business in Chicago.  He felt it was his duty, as a native of the Midwest, to do his part to help grow the Chicago startup ecosystem.  He acknowledges that Chicago has historically had its weaknesses in this regard, with a less robust ecosystem than what has been built in Silicon Valley over the decades.  But, he saw no reason, why the same couldn't be built here.  And, even though Chicago's ecosystem may be smaller, it doesn't mean it is any less effective for success, as evidenced by Chicago's Apex Ventures investing in their last round and Chicago's Tom Ryan, the CEO of Threadless, on his board. 

So, to all my startup and venture capital colleagues on the coasts, keep your eyes carefully focused on Chicago, as its startup ecosystem is becoming as world class as our city!!  With companies like TrunkClub, on pace for $15-$20MM in revenues in their third year of business, helping to lead the way.

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Lessons in Entrepreneurship: Pebble's $10MM Raise Via Kickstarter

By now, you may have learned about Pebble's record smashing $10MM raise through the Kickstarter crowdfunding site back in April 2012.  It is certainly a case study worth sharing with other aspiring entrepreneurs on the fundraising trail.

First a little bit about Kickstarter.  Kickstarter is one of the pioneers in the crowdfunding space, helping artists and entrepreneurs raise donations for their various startup projects.  Since Kickstarter launced in April 2009, it has created a marketplace where over 2,000,000 people have financially backed over 24,000 projects, helping them to raise in excess of $250 million in the aggregate.  It used to bias creative projects from artists (in the $5,000 project range), but startup companies were soon to follow and the average amounts of funds secured has increased over time. 

Pebble's $10MM raise, eclipsed Kickstarter's $10,417 average funding size and blew through the company's original $100,000 request.  Pebble had hit their original $100,000 goal within two hours of launching their campaign, hit $1MM in just over 24 hours, and ultimately ended up at their $10MM raise within a month of kicking off their project on Kickstarter (before voluntarily shutting off the spigot).  And, did I mention, they only offered sample products to their contributors, and didn't have to give up one penny of equity in their business, keeping 100% ownership for themselves. You can check out Pebble's fundraising page on Kickstarter, for more information.

The goal of today's lesson is to figure out exactly how they did that.  First of all, they had a cutting edge product that captured the consumers imagination.  The Pebble watch is basically a product right out of the Dick Tracy comics.  It ties a consumer's iPhone or Android enabled smart phone to their wrist watch via Bluetooth wireless technology.  Now you could keep your phone in your pocket, and use your watch to read text messages, control your music and access GPS enabled applications while working out.  Who wouldn't want one of those!  And, the first-run of these watches were promised to anyone that donated monies to their campaign.

Secondly, they just didn't talk about their exciting new product in words.  They took the effort to build a terrific video, that helped to sell the story in pictures (which you can see here, on their Kickstarter page):

Thirdly, the company's founder & CEO, Eric Migicovsky, had a strong background of his own.  He was a former employee at Blackberry, working on their smartwatch initiatives, and he was a graduate of the highly successful Y Combinator accelerator.  This track record and experience obviously provided an additional appeal to investors.

But, perhaps the most important thing Pebble did was to coincide the launch of their Kickstarter fundraising project, with a well-timed feature article about their product in Engadget, the heavily-read blog for hot new tech gadgets.  The article not only provided a rave review of the product, but it mentioned that Pebble was raising new funds through Kickstarter, including a link to the fundraising page.  The article helped accomplish two goals: (i) it created excitement for Pebble's new smartwatch; and (ii) sparked investor interest in their funding (from an empassioned based of techies, that would further fuel the viral buzz around the product and the funding as they got involved with the company).  Genius!

Pebble is more the exception, than the rule, in terms of what to expect from your crowdfunding initiatives.  But, it is certainly the blue print on how to create your best odds for success (e.g., exciting product + free giveaway + snazzy video + targeted PR buzz + credible team). 

And, it looks like Pebble will not be alone in the multi-million dollar club on Kickstarter.  Keep your eye out on Ouya, an Android-enabled video game console for televisions, which has already raised $5MM on Kickstarter with 23 days still to go.

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2012 Trends: The State of Social Media & Marketing

I stumbled on this great presentation by Esteban Contreras at SocialNerdia today.  It is packed with data on key trends in social media, including Facebook, Twitter, Google +, YouTube and many of the other new players in the space.  In addition to running his blog, Esteban is also the social media manager at Samsung, and brings a marketer's perspective on key trends and best practices. 

2H12: The State of Social Media & Social Media Marketing in the Second Half of 2012

View more PowerPoint from Esteban Contreras

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Lesson #117: Legal Considerations When Using Open Source Software

Many startups use open source software ("OSS") in their service or product offering, to help lower their costs of development and to quicken their speed to market. However, too many startups do not fully realize the risks of using OSS or what "open software" even really means.  To help further educate us on this topic, I engaged the expertise of my colleague, Christopher Cain, a Partner and startup lawyer at Foley & Lardner in Chicago, with deep expertise in copyright and software related matters. 

At the outset, a term you will often associate in the open source context is "free software". Free software as a term distinguishes OSS from traditional copyrighted software.  The two terms "free software" and OSS are used interchangeably, with most companies referring to OSS. So what distinguishes OSS from traditional software? OSS is software distributed under a license that ensures freedom (hence the term "free") to run, copy, distribute, study, change, and improve the source code. Specifically, OSS licenses typically require: (a) no fee or royalty for redistribution; (b) source code must be available; (c) licensee may create derivative works and modifications; (d) derivative works must be distributed under the same license as the original; (e) no discrimination against users; and (f) all rights granted in the original code must be granted in any redistribution.

So, the benefits of using OSS are pretty clear: the ability to get source code without a license fee and the ability to modify that source code and use it in your product offering or service, provided you live by the rules listed above. Moreover, with more popular OSS, you have a community that is supporting the code, finding and fixing bugs and adding features. These are all great things and most start-ups know these. What they don't often know or think through however are some of the risks of using OSS.

What are the risks in using OSS? Well for a start, OSS licenses typically lack any meaningful contractual protections. Most OSS licenses provide that the code is "as-is", without warranties of any kind. There is typically no support and no indemnity from intellectual property infringement. In addition, OSS licenses have not been fully tested by courts. Court decisions are an effective way to clarify the scope and extent of a license. That lack of clarity from courts is heightened by the fact that many OSS licenses were written years ago, without legal input. As such, the licenses can be less then clear. Not surprisingly then, conflicting license interpretations exist within the OSS community. 

More specifically, no clear standard exists on what constitutes a derivative work of OSS. This is a serious issue because it is the ability to create derivative works of OSS that can get a start-up into unexpected trouble. A derivative work is a copyright term that means a work that is based at least in part on one or more original works. For example, version 2.0 of a software program is a derivative of version 1.0 if any of the code in 2.0 is based on the 1.0 code. Recall that one of the requirements of most OSS licenses is that they require you to distribute derivatives of the OSS under the same license terms as the original. That generally means that if your object code contains OSS, you have to distribute the source code for the entire program when you distribute the object code. Most start-ups that intend to license their software do not want to provide their "secret sauce" by providing the source code as well!

To avoid having to distribute all of your source code, start-ups should take care to "silo" the OSS code from their proprietary code or if the OSS is in the form of libraries, use dynamic linking instead of static linking. Both of these at least create an argument that the OSS code is separate from the proprietary code ,and as such, only the OSS source code has to be distributed. To be able to make this argument however, a start-up has to first be mindful of its OSS use. Each OSS use should be intended and compliant. For example, start-ups should keep an inventory of all OSS it uses. If it is not sure, there are automated tools and proprietary OSS databases (like Black Duck Software) that can help parse code and identify OSS components. Start-ups should have a designated person that approves all OSS use, how it is handled and modified in conjunction with the start-up's offering.

Note that you don't generally have to worry about OSS distribution risks if your business model is based on software-as-a-service or a cloud offering.  That is becuase if you are not distributing your code that contains OSS, but instead, are making it available over the internet as a service, the OSS source code distribution requirement is not applicable.  And, worth mentioning, companies can still charge license fees for products that contain some OSS, with the argument you are not charging for the OSS portion, but are charging for the entirety of the product offering including your proprietary code.

Bottom line is OSS is good and has benefits, but be mindful of the risks highlighted above.  Your startup will be the better for it.  If you have any questions from here, feel free to reach out to Christopher directly at 312-832-4553 or ccain@foley.com, and you can follow him on Twitter at @chrisccain.

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