For the quarter ending this past June, we compared the findings of three research firms that reported on the money invested in Q2:

• July 21, MoneyTree (PricewaterhouseCoopers, with data from the National Venture Capital Association and Thomson Reuters): $3.7 billion, with 612 deals,
• July 18, VentureSource (DowJones): $5.27 billion, with 595 deals,
• July 14, ChubbyBrain (a New York City-based startup partnering with ReadWriteWeb): $5.329 billion, with 613 deals.

VentureSource and ChubbyBrain seem to agree on the top line number. But MoneyTree's number is what most people report, and that is about $1.5 billion different.

As the old saying goes, "A billion here, a billion there. Sooner or later it adds up."

Disclosure: Our VC Funding Report

ReadWriteWeb has an interest in this. We sell a report for $299 that has details on the 240 deals done this quarter in the Internet, mobile, and SaaS space (not clean tech or bio tech), and this is powered by data from ChubbyBrain. So we are biased. But it also means that we are engaged and have been looking at this fairly deeply.

Who Cares?

We also think that accuracy matters, and we are trying to figure whom accuracy matters to. We see three main types of participants in the industry:

1. VCs. They need accurate data for their own fund-raising. They have to be able to benchmark their own funds relative to the broader market.
2. Entrepreneurs. Data on what funding deals are being made, and why, helps them figure out how much to raise, when, and from which VC.
3. The startup "community." This is a catch-all for everyone else, who tend to align to either VCs or entrepreneurs. Journalists, the non-aligned fourth estate, want reliable data to key off interesting stories.

Why does this matter? The startup community matters to the health of the overall economy. As the National Venture Capital Association (NVCA, the trade association of VCs) likes to point out:

"Originally, venture-backed companies have created companies that accounted for 10.4 million jobs and over $2.3 trillion in revenue (based on 2006 data)."

So a headline like "VC Investments Falling Off Cliff in the US" really impacts a lot of people. That is the kind of headline that most journalists/bloggers wrote in April 2009, based on data reported by those trusted sources.

We wrote a really boring headline:

"VC Investment in Internet Deals Did Not Fall Off a Cliff."

That's a lousy headline for generating page views. It's a story about "the dog that did not bark."

The point is that headlines drive business behavior to wild excesses on both the down-cycle bust and the up-cycle boom.

Just good reliable data would help.

Innovation Is Global, But It Keys Off US Data

At ReadWriteWeb, we love to track innovation from far-flung corners of the world, and we see the globalization of innovation as a critical trend.

So we want to be able to report on financing trends for early-stage Web technology startups across Europe and Asia, in addition to the US. And we expect any research process to be able to scale to that challenge.

But the reality today is that, globally, entrepreneurs and VCs key off US data. If they were to key off bad data, that would matter to everyone.

Why This Matters

Driving with one's eyes in the rear-view mirror is dangerous. We take action based on what authoritative sources tell us is happening today, and we base our assumptions on what that means will happen next and plan accordingly.

In reality, these sources tell us what has happened in the past, and they may not even tell us that accurately.

When we at ReadWriteWeb look at the macro picture, we favor a contrarian view simply because the reality we see today is often not what the headlines trumpet. When the markets were in the late stage of a boom, we were sounding the warning signals.

When the markets were melting, we began to see surprising signs of life in the early-stage Web technology world we live in.

Whether you are an entrepreneur or an investor, knowing what the crowd is thinking -- and what the headlines are trumpeting -- is valuable. Even more valuable are the underlying facts and trends that may be missing from those headlines. In the disconnect between the two often lies a lot of opportunity.

We hope to ignite a debate that leads to greater accuracy and transparency of these numbers.

When the Q1 numbers came out, ReadWriteWeb did not share the general doom and gloom in the headlines. We reported the "dog did not bark" story when we said that VC Investment in Internet Deals Did Not Fall Off a Cliff. We did that because the headlines did not match what we heard from entrepreneurs and investors and what we saw from our own limited online research. We had been tracking a small segment of the market -- early-stage Web technology investments -- since the market meltdown in October 2008. In April, we started to work with ChubbyBrain so that we could have more confidence in the quality of the research, and we started to see healthy signs in April and May. It was clear that Q2 was going to look good. But it was critical that we were able to trust the numbers. The startup community makes decisions based on these numbers. The quality of the data matters.

What Is Excluded

The numbers would look a lot bigger if ChubbyBrain had included:

• Global Deals. This is only US deals
• Debt. This is only equity
• Private equity (which usually means leverage buyout). This is only VC deals.
• Angel investment (unless they invested with a VC Fund). This is only VC deals.
• PIPE deals (Private Equity Investment in Public Equity). This is only private companies.

We would have liked to include more angel and global deals. They matter to early-stage innovation, and that is what matters to entrepreneurs. But that would not have dramatically changed the numbers. But if you started adding debt and public companies, the numbers would become meaningless: these deals tend to be way bigger than VC deals. One public or leverage buyout deal would totally change the numbers.

Here are two other things we took care to report on accurately:

• For follow-on investments, we only recorded the portion of the investment made in the quarter, not the total of the announced round.
• The amount that actually closed, not the intended size of the round.

Most importantly, ChubbyBrain only includes deals that were verifiable via either (A) regulatory filings or (B) confirmation from firm or investor or (C) press release.

This process might miss some deals. So the total number maybe bigger than $5.3 billion. But we are confident that what ChubbyBrain has found is accurate.

Trends

Next week, we will be doing a deep dive into the segment that matters to the ReadWriteWeb community: Internet and mobile deals.

The quick takeaway from this early look is that money is available for early-stage startups. Despite conventional wisdom that venture firms would invest only to fortify existing portfolio companies, the quarter saw healthy levels of early-stage investment in seed and Series A rounds, accounting for 35% of the number of deals. This confirms the anecdotal evidence we get from talking to investors and entrepreneurs.

We do not see this as a sign that the general economy is recovering. It is too early to call that. But we do see this is very hopeful news for entrepreneurs. And what is good for entrepreneurs tends to be good for the general economy at some point in the not-too-distant future.

Specific areas of interest for IBM investment include analytics, clean tech, cloud computing, smart grids, electronic health care, and green data centers. The company's expansion into Vietnam is a response to what they see as accelerated IT growth in that area.

"The country's IT sector is growing over 20 percent annually, fueled by massive Internet expansion and a younger population that's driving consumer demand for infrastructure improvements."

The first IBM Innovation Center in Vietnam is the sixth such site to open since 2007 and the forty-third in the past decade. The center will be based in Ho Chi Minh City and will focus on the development and marketing of new tech across banking, telecom, energy, and government industries. Here, local developers and others will find training and access to open standards-based tech.

The company will also be collaborating with local VCs to support the development of emerging technology products. Similar partnerships now account for nearly a third of IBM's revenue and have doubled since 2008, when IBM partnered with around 8,500 companies.

IBM is also turning its attention and earmarking funds to develop relationships with the University of Technology in Ho Chi Minh City and the College of Technology in Hanoi. Their goal is to create a curriculum in cloud computing at the former institution and service sciences at the latter. Computing labs and new departments will be created as a result.

IBM is also debuting the first local-language version of developerWorks, its online resource and social network for developers.

As for IBM's strategy of investment in growth sectors outside the U.S. and Western Europe, Freeman wrote, "The strategy is paying off.

"For example, in Brazil, more than half of the country's estimated 2,000 independent software vendors (ISVs) have become IBM partners. In China, IBM continues to recruit partners at record rates, with more than 11,000 registered so far this year. In India, IBM has over 2,500 business partners across 200 cities, ranging from small resellers to global systems integrators and ISVs - business partners now drive 35 percent of revenue for IBM in India."

Certainly, this smacks of global domination; after all, is not IBM the Starbucks of IT? The company's unrelenting expansion in areas that can least refuse its injections of tech and capital has been making headlines for years. It likely wouldn't hurt IBM to create dependent tech ecosystems in these areas, and we cannot overlook the fact that IT labor is cheaper in many of these parts of the world.

Some have also begun to question IBM's role in South Africa, an area that Freeman specifically mentioned as a growth area ripe for strong investments. The company has a rough history there; a U.S. federal court recently ruled that IBM can be held responsible for enabling apartheid by providing regime leaders with IT infrastructure used to disenfranchise and harm black citizens.

When IBM declared its lack of responsibility for how clients would use its products, the judge countered, "That level of willful blindness in the face of crimes in violation of the law of nations cannot defeat an otherwise clear showing of knowledge that the assistance IBM provided would directly and substantially support apartheid."

IBM is not UNICEF. Historically, like almost any multinational corporation, they have followed profit amorally, whether the revenue streams led to their helping oppress or enlighten the citizens of any geographical area. These partnerships in developing areas are highly profitable for the company. And let us not imagine that their desire to invest in green tech or healthcare-related tech comes from any kind of altruism: These are hot, bankable areas right now.

Still, sometimes capitalism does work for the best for all parties involved. Let's hope that Vietnamese techies benefit as much from IBM's expansion into their country as the company itself doubtless will.

Much like Remarkable Wit, a venture technology firm we recently covered, SproutBox focuses on product development and essential business services, investing talent in startup companies in exchange for equity.

At the BIGOmaha conference this morning, founders Trotzke and Wisler sat down to talk about the SproutBox approach and what they think will make a good startup project.

Starting today and until August 8, SproutBox will accept applications from entrepreneurs. Interested entrepreneurs and start-ups can apply online at SproutBox.com.

As a means of proving the model, SproutBox has already completed work on two projects. The team developed DecideAlready, a web-based decision-making tool, and CheddarGetter, an easy-to-use online subscription management and billing tool which is currently accepting requests to join its private beta.

In the announcement, Biz Stone says that Twitter is now in a position to "begin building revenue-generating products." Twitter also expects to grow its team in the next year.

Web vs. API

One interesting (though not unexpected) statistic in the funding announcement is that Twitter now gets almost twice as much traffic from its API than from the web. That number will surely drive how Twitter plans to monetize its service. If only a few people come to Twitter's web site, then just putting advertising on the site will not drive enough income to Twitter to keep the service afloat in the long run.

Twitter also announced that it grew 900% in the last year.

1. The average deal size is increasing. The average went from $2.12 million in November to $4.11 million in December to $6.06 million in January.
2. California still rules, but global investment is happening. In the US, venture capital is still dominated by Silicon Valley, but we are seeing a few more global deals, specifically in the UK, Canada, and English-speaking India.
3. Total diversity was apparent, without any market-segment bias. This is a good sign that ventures are being evaluated on the fundamentals rather than on what's hot.

Which Ventures Received Money?

December:

• NetShelter
• dotblu
• InnerRewards
• KZOInnovations
• smartfundit
• Appcelerator
• Wordstream

January:

• HubDub
• Sittercity
• Appnomic
• CloudSwitch
• GoInternetMedia

Which VCs Wired the Money?

December:

• Rho Canada
• GrowthWorks Canadian Fund
• JLA Ventures.
• DE Shaw, Maple Investments
• Valhalla Partners
• Baytech Venture Capital
• Storm Ventures
• Sigma Partners

January:

• Pentech Ventures
• Apex Venture Partners
• Norwest Venture Partners
• Atlas Ventures
• Matrix Partners
• Kennet Partners

Founders Fund has invested in some of the most high profile startups in the market, including Facebook and Slide.com. We covered the move in depth over on Jobwire, our site reporting on new hires in tech.

However, we've also lowered our cut-off to $0.5 million. Tougher times lead to smaller rounds, which is not necessarily a bad thing because tough times force you to do more with less money. This got our list up to nine deals in total for November.

Below, we have linked each company's name to its entry in the Trade Vibes-powered ReadWriteWeb Company Index (or to the company site if there is no entry). You can use this as a starting point for research and comparison, referring to the venture's own site when needed.

• Machinima
• CarWhale
• Maxplore
• Open Candy
• Zuberance
• Carbon Flow
• Casual Collective

Note: a commenter pointed out that in our original A-Team post we missed Siri, which raised $8.5 million in October, although we have written about them before.

So please tell us who we missed in November. We will correct it in December.

Which VCs Are Wiring The Cash?

We identify only the lead VC in the following list (assuming that the first one listed in the PR material is the lead). We aim to make this more in-depth next month by showing all of the VCs that participated.

• Pond Venture Partners
• MK Capital
• Sierra Ventures
• Emergence Capital Partners
• Bessemer Venture Partners: check out its Anti-Portfolio.
• Clean Pacific Ventures
• Lightspeed Venture Partners: it has one of the best blogs in the venture business.

Emergence Capital Partners did two Series A deals in November (Maxplore and Zuberance). That is pretty cool.

If you want to talk to the firm, here are the basics:

Investment categories:

• Software-as-a-Service (SaaS)
• Consumer services
• Digital and social media
• Information services
• Business services
• Cloud computing

Investment criteria:

• Early and growth stage
• Compelling customer value proposition
• Market leadership potential
• Experienced and passionate management team
• $1 to $10 million initial investment
• US preferred

Emergence is riding the enterprise SaaS wave. Most VCs missed that wave, as we found when we surveyed gritty entrepreneurs. That sector was out of favor at the time, and most ventures simply did not get VC funding then.

Where Are Ventures Getting Funded?

It looks like California is still doing the dreaming, with six out of the eight ventures residing there. The other two are from outside the USA: one from England and the other from India.

Which Sectors Are Getting Funded?

The biggest theme was video, specifically games, but there were also two that had a green focus.

Here's hoping that December will be an even better month.

• A minimum of $1 million. We don't want $50,000 financing being called Series A. Sorry, no grade inflation here.
• Lead Institutional VC. There are plenty of other very good types of financing. We celebrate bootstrappers in our Gritty Entrepreneurs series. Angels are wonderful, and we all love friends and family. But this series is about the classic VC fund, the core of the start-up financing world. We only report the lead VC because that is what matters: with a good lead there is never a shortage of followers.
• Reported data. We need to see the dollar amount and the lead VC publicly reported. No "unreported sum" or "undisclosed investors." If you want to be stealthy, you don't need any visibility, which is fine.
• Web technology only. We are seeing a lot in alternative energy, biotech, and other sectors, which is all very interesting, but not what we do at ReadWriteWeb.
• Series A only. We recognize that getting Series B or C financing is important as well, but it is hard to see from public data whether these are really positive events or not. During a downturn, many of them, sadly, will be down rounds that protect VC capital but, because of onerous preference terms, often leave the entrepreneurs with very little. We don't want to celebrate something only to find it is viewed as negative by the participants. But everybody can celebrate a Series A: it speaks of optimism, new trends, and a go-for-it spirit.

The Heroes And their Partners

We believe that entrepreneurs are the heroes, but we also really want to celebrate their partners, the VC guys who have the guts to go against the trend and back them during tough times. All VCs talk the talk, which is that this is a great time for investing. We want to report on the ones who actually walk the walk as well. There is only one way to get into this list: close a Series A round and wire the money.

We want to use this to learn about changes in the VC business and so that entrepreneurs can see who is actually doing deals today.

Our A-Team Series Starts in October

October 2008 was a unique month for anybody in the business world. The word that kept dropping from the lips of even the most experienced been-there, done-that kind of person was "unprecedented." These are not normal times. And October was certainly not a normal month.

So, the October list was pretty short. We have heard plenty of stories from entrepreneurs about deals that were agreed on and in the final legal phase but that got pulled in September and October. We did not track September because the worst and final phase of the crash kicked in mid-September, and deals were still being done in the early days of September. So, October was the first full month of the new reality.

We count from the date when the deal was announced. But we recognize that the contract may have been signed some weeks before then.

Enough Preamble. What Deals Were Done?

Oops! Using our strict criteria, only one deal was done in October. We saw some that came close. We saw a seed round of $225,000 for a game company called Kirkland North from a venture fund called Harrison Meta Capital. We saw a Series B for $4.5 million coming from RRE Ventures to our good friends at Adaptive Blue. We saw an Israeli company called CogniSafe getting an undisclosed seed round from 21 VCs.

The one deal that squeaked into October was Zimbio with a $6.8 million Series A from DFJ and Menlo Ventures. The deal was announced on September 30th. So it is entirely possible (indeed probable) that this contract was signed before our official Meltdown Day. But the deal got done, and that is what matters.

Zimbio has very few facts on its "About Us" page. TradeVibes at least has a CEO listed; so we tracked down Anthony Mamone, and the data was sparse, not even a LinkedIn profile. All we found was a sketchy profile on Link Silicon Valley.

A Special Cheer for Syncplicity and True Ventures

The deal that kicked off the A-Team series and gave us the idea for it was the one with Syncplicity with its $2.35 million Series A funding from True Ventures. So we went to meet Leonard Chung, CEO, at True Venture's offices in San Francisco. True Venture's open-plan offices on Pier 38 do not look like classic VC, and that is probably the point. Phil Black of True Ventures made the point that ever-increasing fund sizes were taking VC away from its entrepreneurial start-up roots.

Then we noticed that our friends at GigaOm have their offices right next door. No coincidence as it happens, True Ventures was the lead investor in their Series A funding. So, True Ventures is a founding member of our A-Team. Take your best venture to them!

We have not had time to fully review Syncplicity yet. We promise to do so soon. So, in the meantime, we will fall back on the journalistic standby, quoting from its site:

"Everyday sync, backup, and sharing as simple as can be. The only all-in-one service that makes sure your files are everywhere you need them."

That is a crowded space. But so was search when Google entered the market. Getting an A round done in today's market makes one think they must have done something right, so we will check them out and urge you to do the same.

Good News from a November Sneak Peek

Here is the good news. Taking a sneak peek at November, around the middle of the month, we already see quite a few Series A deals that meet all of our criteria. We will tell all in our A-Team report in early December.

Who did we miss in October? (No spam please; look at the qualifying rules above.)

Boxee, which is still in private beta testing, is a media center solution that allows you to play back content from third-party providers like Hulu, CBS, Comedy Central, or Last.fm through a very slick interface.

Open-Source on the Apple TV

Most of the hype around Boxee right now is due to the fact that it can be installed on an Apple TV, which greatly extends the functionality of these devices.

As Boxee is an open-source program, developers can easily extend the functionality of the application and develop plugins for it. Boxee's back-end is based on the open-source xbmc media center project.

The Firefox of Media Centers

Fred Wilson calls Boxee the "Firefox of the media center software sector," and judging from what we have seen of it so far, we would have to agree.

According to Boxee's announcement, the company will use the additional funding to extend its user base and to extend the feature set of the software. Hopefully, this additional funding will also mean that we can soon see hardware with pre-installed versions of Boxee.

quick intro to boxee from boxee on Vimeo

While the press release doesn't go into any detail, it seems safe to assume that the company needed a new infusion of money to sustain its rapid growth. While a lot of its competitors are for-pay, SpeedDate has adopted a free model, though it is considering the addition of a premium as well.

Online dating is a competitive field, where large entities like Match.com, eHarmony, and Yahoo Personals seem to dominate, but at the same time, other sites like Randomate, WooMe, or OmniDate have been able to carve out a niche for themselves by putting different twists on the online dating model. SpeedDate.com, though, with its instant webcam conversations, looks like it stands a good chance to continue growing in this competitive field.

In this post, we explore the basics behind corporate entities, stock, financing, and the key non-technical infrastructure every company should have.

Business Entities

There are several ways of conducting business in the United States. The most basic is a Sole proprietorship, which is essentially self-employment. A sole proprietor, such as a grocery store or restaurant, assumes full legal liability for the business, but all income is direct personal income and is taxed once.

Another form of business is a Partnership. This is a venture between several individuals who share in the profits. Partnerships, and particularly Limited Liability Partnerships (LLP), are created to address the personal liability issue with proprietorship. With LLP only one or a couple of partners assumes the legal liability.

Corporations are a separate legal entity. When a corporation is sued, in general the individuals behind it (shareholders, directors, management) are not impacted. This legal protection comes at a price - double taxation. Companies have to pay tax and only then can pay salaries and dividends to the shareholders.

In recent years, people have been incorporating in two principal ways - LLC and Inc. LLC is a limited liability corporation, a hybrid between corporation and a partnership.

LLC enjoys the legal status of a corporation, but has partnership-like taxation. It is a great way to incorporate before you know how big your company will become. The caveat with LLC is that you can't have more than a certain number of shareholders (typically around 70). For this reason, Venture Capitalists would normally not fund an LLC because it's impossible to take such a company through an IPO (Initial Public Offering).

Most tech startups end up being C-Corp or a corporation (often, you can start with LLC, then convert to a C-Corp right before raising substantial funding). A corporation is the most sophisticated business entity. It is a powerful but complex vehicle, with flexibility. 

Shareholders, Directors and Management

A company starts with incorporation - a process of forming. These days it's cheap (around $300) and straightforward. You can either incorporate on your own or, better, utilise your accountant or lawyer.

You incorporate in a particular state, usually Delaware with its liberal laws and taxation policies. You don't need to live in Delaware to incorporate there, but you do need to also declare your existence to whatever state(s) you plan to operate in. The corporate laws vary substantially, so ask your lawyer and accountant about regulations in your state.

After incorporation, you issue a stock - a unit of ownership in the company. In startups before funding, there is little reason to spend time on issuing shares, because when financing comes you'll need to reissue. Easiest is to declare that you have 100 shares of common stock and divide it between the founders as agreed prior to starting a company. 

There are three principal types of participants in every company - shareholders, directors and management. Shareholders, or the owners, vote and elect the board of directors, who set long-term strategic direction and appoint executive management. The management (CEO, CTO, etc) is responsible for the day-to-day operation of the company.

While you might find this 3-tier structure initially confusing, it does make sense. In large companies directors are mostly outsiders. Directors represent the interest of shareholders and hold management accountable for the performance of the company. In a large corporation, typically the CEO is also a President or Chairman of the board, but the rest are directors outside the company. For small startups, the situation is simpler. You are a shareholder, a director and a manager of your own company.

Key Documents

In a startup, you need to understand when to wear the hat of a shareholder, director or a manager. Looking at a company from the perspective of key legal documents helps you do that.

The first document is Articles of Incorporation, which declares the kind of entity, state of operation, classes of stock, and number of shares. The next is a Shareholders Agreement, which typically discusses the rights and obligations shareholders have in situations like sale of the company, sale of stock, or death of a shareholder. And Corporate Bylaws is the guide by which the board operates; it specifies who can be a director, how often meetings are held, how voting is done.

The employees of the company - e.g. CEO, VP of Design and Software Engineers - all sign an agreement. These days, employment agreements typically consist of a short offer letter and a lengthy non-competition agreement. The letter outlines the position, salary, vacation, and other benefits. The letter asks the employee to obey standard corporate rules and regulations. In addition, a lot of startups offer employees stock options - a way to earn the right to buy a stock in a company.

Legal and Finance

A first-time entrepreneur will find the legal complexity and accounting for a corporation overwhelming. It is essential to hire lawyers and financial professionals. There is a saying amoung startups and VCs that a good lawyer pays for him or herself, despite the fact that hourly fees are whopping.

There are three kinds of lawyers needed in a tech startup. A corporate lawyer drafts the basic documents and will advise on daily matters. A deal lawyer specializes in financing and sales transactions. And if you have intellectual property to protect, then you'll need an IP lawyer.

Financials of a startup can be split into daily simple things and annual complex matters. For a startup, it is ideal to get a bookkeeper - a person to take care of payroll, monthly profit and loss, and basic financial documents. You need an accounting firm for annual taxes and larger issues.

Accountants are more expensive than bookkeepers, but since you don't need to use them for daily operations, it makes sense to have an accounting firm do your annual finances. In addition to taxes the accountant will product a compilation - a summary of annual activities. After you get funding, the board of directors will ask for an audited financial statement - a full, certified financial review.

Venture Financing

To turn your idea into a big company, you will likely need to raise money. This is essentially a sale of shares to investors. A typical company goes through several financings - angel investment and then a few rounds of venture capital. The angel round is typically small, traditionally less than a million dollars and lately substantially less (thanks to YCombinator and TechStars). In the angel (or seed) round, the founders may offer 10-15% of the company in exchange for a convertible loan. Technically, this is not a direct sale of shares, but instead a right to buy shares in the next round of financing at a discount, while accruing interest.

Traditional angels are wealthy individuals, often former successful enterpreneurs and executives at large companies. Each angel might be willing to put down between 10-100K, with 25-50K being typical. So if looking to raise 500K, you would need to line up 10 or more angel investors. You can simplify it if you find a local group, for example New York Angels.

The next round of funding, called Series A, involves Venture Capitalists (VC). A venture firm is essentially a partnership that manages an investment fund. The fund raises money and invests into startups and later stage companies.

The VC world is complex and it's important to know how to navigate it.

The first rule - know what firms are right for you at what stage. The right firm will be the one that's interested in the sector you're in as well as the size of the investment. VC firms manage anywhere between $150M - $1B, with a typical tech fund being around $300M. Since the time of each partner in the firm is limited, there are only so many investments the fund can make. So, if looking for 500K, it doesn't make sense to approach VCs.

A typical Venture Firm will look to own 20 - 30% of your company over its lifetime. When the investors put money into your company, they will protect themselves in cases when the company might not do well. They will ask to create a class of preferred shares (preferred stock) that will be subject to different rules than the common stock (those you own). Preferred stock is paid first in case of an exit, and it enjoys veto rights such as precluding you to sell the company, or the opposite - forcing a sale.

It is common for a venture firm to elect a director on your board. This is the partner you are essentially working with. In early stage companies, a VC plays an instrumental role in mentoring the CEO and shaping the course of the company. As the company grows and perhaps even goes public, the VC director steps down from the board.

More Funding

Each round of funding expands the number of Venture firms at the table and results in dilution. To understand dilution, one needs to understand the mechanism by which startups raise money. Each round of funding results in additional shares being issued by the company and sold to the investors. Typically, investors are not buying shares that you already have, they are buying newly issued shares.

The money raised is not going into your pocket, it goes to the company. In some cases, when you're doing stellar, investors would be willing to buy your shares - but this is atypical. As a result of each raise, founders and employees own less percentage of the company (their number of shares remains the same, but the total number of shares increases). Prior investors are able to maintain their respective ownership by buying additional shares (this right is given via preferred stock).

Despite the fact that startups are reluctant to give up ownership to VCs, the economics actually make sense. Even though your percentage of ownership goes down, the total value of the stock is higher after the financing, because the value of each share rises. As long as the company is doing well, fund-raising makes sense and is beneficial to its employees.

Conclusion

There is a considerable amount of complexity surrounding building a company. Way more than just a great idea and elegant code is involved. But building a company, learning the intricacies, understanding the law and venture world, is fun.

Instead of being afraid of this complexity, startups need to appreciate it and embrace it. Most lawyers, accountants and investors are smart people whom you will learn from. They will help you make your startup into a real company.

As a start point, you should create an LLC and not worry about much paperwork. Once you get into investment, you'll need to change to an Inc, get a lawyer, bookkeeper and accountant, and start diving into the details discussed in this post.

There are two excellent resources to get additional material: Ask The VC - a blog maintained by Brad Feld and Jason Mendelson; and Ask The Wizard - a blog by former CEO of Feedburner, Dick Costolo.

As always we look forward to your questions and we also ask you to share your tips on the essentials you picked up during your startup life. Join the conversation!

This investment from Bezos comes just a few months after SGN raised a $15 million Series A round led by Greylock Partners and the Founders Fund.

SGN is monetizing its games mostly through advertising, but also through subscriptions and sales of virtual goods. The company's properties have about 1 million daily users, enough to make it attractive for large advertisers.

Overall, users have installed SGN games over 50 million times and handed out over 70 million gifts. It is, of course, questionable how many of these 50 million apps are still active, but with 1 million daily users, SGN is definitely one of the larger players in the casual gaming market.

Casual gaming is clearly turning into a major platform for advertisers. While both Kongregate and SGN are mostly focused on the web, the large range of casual games already available on the iPhone and other mobile devices shows that there is a very large market for them.

At the same time, though, it seems quite a few users are also very willing to actually pay for these games - as long as the prices are reasonable. As more and more investors are looking for companies that are not fully dependent on advertising for their revenue, the casual gaming market is probably going to see more investments like Bezos' in the near future.

The venture investing process used to be largely a mystery. Young entrepreneurs were not sure how to value their companies, nor were they sure what to make of the term sheets offered to them - largely because the mechanics of venture math weren't open to them. But recently the rules of the game have changed. The venture process is now much more open, in no small part because of Brad Feld.

Feld is also responsible for building what is today a thriving tech community in Colorado. When he moved to Boulder 15 years ago with his wife Amy, there was little to no tech presence. Today Boulder is a boom town, buzzing with some of the sharpest brains in tech. Companies like Lijit, Me.dium, and Gnip, as well as a whole pack of TechStars (which Feld started with Dave Cohen) alumni headquartered in Boulder.

Besides making a huge impact as a VC, Feld is one of the most inspirational people I've met. It is my pleasure to connect our readers with him via this interview.

What is your background?

I grew up in Dallas. I got an Apple II computer for my bar mitzvah and quickly became a reasonably well adjusted teenage computer nerd way before it was cool. I went to MIT, got a few degrees from there, and started my first successful company (Feld Technologies) when I was a sophomore. With a partner, we grew Feld Technologies into a decent sized (20 person) software consulting firm before selling it in 1993 to a public company (AmeriData Technologies). I worked for a few years at AmeriData while making angel investments with some of the money that I made (companies like Net.Genesis, Thinkfish, Harmonix, and Critical Path).

My wife Amy and I randomly moved to Boulder, Colorado from Boston in 1995 (Boston wasn't home for us) and have never looked back. In 1995 I started working with the Softbank making investments with them and in 1996 teamed up with three of the other guys working there to start Softbank Venture Capital (which turned into Mobius Venture Capital). I've been actively investing as a VC since 1996 in a wide range of software and Internet companies around the US. Last year (2007) I started a new firm with four of my friends from Mobius and we launched our new fund (Foundry Group - www.foundrygroup.com) in the fall of 2007.

How did you get interested in the Venture Capital business?

While Feld Technologies never took in any investment (we only raised $10 to start the company) a number of our customers were Venture Capital firms. We wrote back office software for the VCs to help them manage their portfolio accounting and reporting which - prior to us coming along - was a nasty spreadsheet exercise. I got to know some VCs and after we sold Feld Technologies did some consulting work for a few of them as I was investing as an angel investor. My connection with Softbank was random but timely, as Softbank was making an aggressive push to invest in Internet companies in the US (which directly overlapped with my angel investing). I woke up one day and had co-founded what became Mobius Venture Capital.

What are the top 3 things that you look in a company before you invest? Is there any one thing that always kills the deal for you?

I am a thematic investor. I like to pick a few themes - either deep technological protocols or what I anticipate to be broad market changes in the adoption and use of technology - and invest in the themes over a 10+ year period. Historical themes including email and RSS; current themes include these along with the Implicit Web, Human Computer Interaction, Digital Life, and something we call Glue.

So - thing #1 is "does it fit a current theme?" If no, we pass unless it is an entrepreneur that we know or have worked with before (we aren't a slave to our themes, but the bar for looking at something outside a current theme is usually having an existing relationship.) The next thing we look at are the people. Are these people we want to work with? Do we think we'll have fun creating a company together? Do we trust each other and believe we can have an open conversation regardless of the circumstances? Will we be able to kick ass together? If we get past these two gates, then we go deep.

What was your best/worst investment ever?

Best: Based on combined financial metrics and realized absolute dollar returned, probably Service Metrics. Worst: In terms of heartbreak, probably Interliant. I co-founded it, it maxed out at a $2.5b public market valuation in 2000, and was bankrupt in 2002. I've had plenty of bad investments that didn't ever get off the ground; the toughest ones for me have been the ones that had huge value at some point and then got decimated when the Internet bubble burst.

What are the top technologies that you want to invest in over the next 3 years?

Implicit Web, Human Computer Interaction, Digital Life, and Glue.

How did you become a marathon runner?

I was a cross country runner in high school and always loved running. When I hit age 35 (around 2001) I was a blimp, way out of shape, and physically worn out because of how intense work had become. I decided I needed a big goal that would force me to spend time away from work that would benefit me. Marathon running was a logical one since I had always loved to run. I decided that I would run a marathon in every state in the US by the time I turned 50. I've knocked down 10 of them (the 11th is happening on June 21).

Which business leaders, past or present, do you admire the most and why?

Warren Buffett, Bill Gates, Andrew Carnegie, George Soros, and my grandfather.

What is one insight, business or technical, that you want to share with our readers?

"Do, or do not. There is no try."

What is the meaning of life according to Brad Feld?

When it's over, they dig a hole in the ground, put you in it (or spread your ashes somewhere), print your picture in the newspaper and write some nice things about you, and then life goes on for everyone else but you. Live every minute that you have.

Before looking at the speed bumps, here are three reasons why New York should be the center of tech/media startup scene:

1. New York is cool.
2. New York has the clients.
3. New York has the money.

Lets look at why these three things matter, and in particular, why they matter to the next phase of web technology.

New York Advantage #1 - cool. Do I need to be so uncool as to list all the reasons why New York is cool? It is cool in a way that Los Angeles, with its movies and music scene misses. It's the edgy edge. London has it as well. Berlin has it. It's a city thing. Sorry, San Jose and Palo Alto, suburbs are not cool. Provincial cities like Austin and Boston are also not cool. Why does this matter to web technology? Web 2.0 is a consumer wave. The web really is replacing, surrounding, augmenting and extending all traditional forms of entertainment. And to make it in entertainment, you have to be cool, or hot, or whatever is the cool or hot word. Cool is a sustainable competitive advantage. No person can be cool for very long, but a city can be cool for a long time. New York is as cool today as it was when Frank Sinatra was doing his thing or when the New York Dolls were inventing punk music. New York has that unique mix of media, fashion, and money that enables cool to thrive.

To see the difference, look at two contenders in what is possibly the hottest consumer web technology wave right now - live online video - Ustream.TV from the Valley and Mogulus.com from New York.

Ustream.TV seems to have the edge if you look at the numbers. But, it just looks so corporate. It lists all these stars that have channels and you cannot even click on them. The traditional big money institutional VCs are pitching at the already established online stars, such as Chris Pirillo. Yes I know it sounds absurd, outside of The Kingdom of Geek, to talk of Chris Pirillo as an established star. But in this very, very early phase of live video online, his niche audience of early adopters does matter. But, as Hollywood knows, stars are fickle, they move to whatever channel, studio, network or whatever that gives them the best deal, as they should.

The "network" matters. It has to have an identity. People have to make a decision about which URL to visit. Live video is a totally different medium from archive video, where YouTube reigns supreme. You "tune in" to a network that suits your style. Just like you hang out in MySpace or Facebook or Bebo or whatever depending on what suits your style. This is about making a fashion statement.

You can see the difference when you look at Mogulus.com, New York's entry in the live video space. It has that rough, street feel - and all cool fashion comes from the street. But don't confuse that with lack of design. This is a very carefully thought out, well executed design. They don't say anything about their funding other than that it comes from "private investors." I mean, who cares? It also has a sense of humor and personality.

So cool does matter and New York has it.

But somebody has to pay for cool and that brings us to New York Advantage #2 - clients. Specifically the big consumer advertising budgets, which in America means Finance, Fashion, and Pharma and all three are found in New York. OK, Pharma is across the tunnel into decidedly uncool New Jersey, but that's a short hop for an entrepreneur and the Pharma guys want to make the trip to Manhattan (to catch a show and try the latest restaurant). Madison Avenue, in all its old and new guises, serves these big consumer advertising clients and Madison Avenue is in New York - but then you knew that right?

And finally - New York Advantage #3 - money. Or as the Grateful Dead put it - "New York has the ways and means." Yes, startups flock to Sand Hill Road when they want the money. But guess where the Sand Hill Road crowd comes when they want money? Yes, New York, that's right. This is the big money place. This is where you go through the likes of Goldman Sachs or Morgan Stanley to tap the biggest, deepest, most liquid equity markets in the world. This is where you find the guys who look after pension funds, who put the money into those Sand Hill Road funds. This - or maybe Greenwich, an hour away from Manhattan - is where the Hedge Funds trade the world.

The odd thing here, is that big money currently makes a bi-coastal round trip. It starts in New York, gets sent to Sand Hill Road, where the top tier VC funds distribute it to a few startups who, when they make it big, make the pilgrimage back to New York to meet with Goldman Sachs/Morgan Stanley who will give them their golden ticket, otherwise known as the IPO. Yes, I know that last part of the circuit has been unwired recently, but that will change. Wall Street just needs some Web 2.0 ventures that are pulling in profits.

This bi-coastal round trip may be about to change. The reason is that this wave is more about media and less about tech. We tend to bang those two words together now as tech is going consumer and is funded by advertising - which sounds like media. In the tech venture world, the Valley reigned supreme because the ecosystem was there. You built a chip that went into a computer that made it big because of the operating system and all the people who mattered in that ecosystem hung around in the same zip code.

In a more open standards, API-driven world, that physical proximity matters less. In a media world, where "let's do lunch" is the social lubricant, proximity does still matter and New York (and Los Angeles) has that ecosystem - Ad Agencies, Fashion, Consumer Advertisers, Media.

So you get it? I love New York. So, just what's the problem?

1. Tech Talent. Wall Street sucks it in. The big Wall Street firms just pay too much. A nice Wall Street crash with lots of layoffs would solve that problem (unfortunately that may coincide with a Main Street recession, which stops the party for everybody for a while).
2. Patient Capital. New York is a "hot money" town. New York investors just love liquidity. They worship it. "What's your exit route?" means, "could I sell today?" So angel and VC options are weak compared to the Valley and even compared to say Boston or Austin. There are great and honorable exceptions. The New York VC with the most brand recognition and track record in web technology is almost certainly Union Square Ventures and they are New Yorkers through and through. But they are far from the only game in town. It is now possible to build a reasonable short-list of early stage VC firms in New York or very close by. But, this is still far from the Valley funding ecosystem. It's not even close.

I believe that the New York venture capital situation is improving for the next wave of technology-driven media companies, though. You can see that when you look at Mogulus. They have raised $1.2m from angels. They don't say who the angels are (New Yorkers like a bit of privacy) but I suspect that they are comfortable with a media venture in a way that they would not be with a tech venture. "TV?" "Yep, I get that." Media of all types has always been funded out of New York. Now that the web is officially media, the web will get funded out of New York.

And on the talent front, Mogulus has an interesting one-liner at the bottom of their Corporate Facts:

Corporate Facts

• Mogulus LLC is Based in New York
• Founder and CEO - Max Haot
• Funded by Private Angel Investors
• Development Office Out of Bangalore, India

This is not about India, it is about the ability to build software using virtual teams. If that hot developer rejects your offer to join for $100k base because Morgan Stanley offered $140k plus cash bonuses, find the guy/gal in Boise, Idaho who thinks $100k is more than enough for a nice outdoorsy lifestyle, and your stock options give a shot at real money down the line. Yes, you may need a core team that's local, but you need less people.

Of course, if you want to know "The Secret to Hiring Great Developers," go to a Mogulus channel called "What's Up Silicon Alley." (Embedded below.)

What would really change the game would be if the NASDAQ IPO market opened up again for tech/media startups. It has been closed since Google came out. If ventures can get funded in New York all the way to profitability, the investment bankers can take over the next step, without any hand-over to the Valley. This is when the New York Hedge Funds and Private Equity players come in to fund from the venture phase through expansion to the stage where public market investors get interested. Then the Valley VC funds will set up offices in New York, just like they are doing in Israel, India, and China.