Understanding how start-ups work with Brooklyn Bridge Ventures’ Charlie O’Donnell
Many of the products and tools we use every day were born in the office of a venture capitalist. Of course an entrepreneur conceived the idea first, but innovators often depend on the financing of an investor to make the idea a reality.
New York-based Charlie O’Donnell of Brooklyn Bridge Ventures (BBV) is one such venture capitalist, specializing in seed-stage investments, which are what they sound like: Initial capital generally used by the recipient company for product or service development, market analysis, or as O’Donnell puts it, to take a prototype to fully built, test and integrate it for a little while and determine if there’s something there or nothing.
Venture capitalists don’t just take giant wads of cash and throw them at people who come knocking; rather, a VC evaluates a the prospective company (some more fervently than others) before cutting any checks. “First you’ve got to decide whether or not you want to work together with somebody,” O’Donnell tells Guyism. “If you get to that point what you’re really trying to figure out is not how much the company’s worth, but how much money does it need. That’s the more important number.”
Another key question, O’Donnell explains, is “‘How much do I trust you?’ Let’s say I think that your idea between now and IPO will take $10 million dollars – I’m not going to go give you the $10 million now. What if you turn out to be a total flake? So me and some other investors will just give the $500 grand now. Once we figure out what that right number is, the valuation part is easy.”
A seed-stage investment is usually just one of a few rounds of a company’s financing. At each round, the investor(s) take roughly 20 to 30 percent of the company, with the investor’s financial stake generally a function of the price. For example, if a company is worth $2 million and the investor gives $500 thousand, the company is now worth $2.5 million, and the investor owns $500 thousand of that $2.5 million, or 20 percent. “At each round, usually the company is worth more and more, so the entrepreneur’s slice of the pie is smaller percentage wise, but it’s a bigger pot,” O’Donnell says.
But the investor’s stake may be smaller, depending on the agreement or the investor’s inclination. In addition to venture capitalists, start-ups also get backing from people known as “angel investors,” who might be any well-heeled individual who decides he wants to help an entrepreneur get off the ground. Angels often support projects with a smaller stake. Compare that with venture capitalists, “who have a pool of money but they have a fiduciary responsibility to do right by their clients and make a certain amount of return,” O’Donnell says. “BBV is a fund with a certain amount of commitments. My job is to go out and invest that. But it’s not my money.”
According to O’Donnell, a good idea is vital but it’s not necessarily the most important thing. In his evaluation, the most common deficiency of a start-up is the team. “Because it’s easier to come up with a good idea than it is to be the person to execute it,” he says. “Sometimes it’s pretty obvious what’s the right solution in a market, but it’s not easy to do and maybe your or your team doesn’t have all the capabilities. For you to get credit as the right team – are you the best team I could possibly hire to do this? And if you’re not, I might as well wait for the right team to come around and do it because there’s a limited amount of money.”
As far the Average Joe coming along with the next great innovation, it makes for a nice movie script but it’s often just that. O’Donnell says that to have the really good idea and to do work to vet it, usually you need to be part of the industry and have the ability to test the idea.
He adds that the brilliant idea doesn’t necessarily have to be a brand new concept, though. “Mark Zuckerberg never had an answer [to] how Facebook was different than Friendster.” (How many of you remember Friendster, which Google offered to buy out for $30 million in 2003 when it was just a one-year-old start-up?) O’Donnell adds, “Facebook had distinct features, it ran faster, it had a better, crisper design, didn’t have ads in wrong places. He just re-did Friendster but much, much better. It didn’t have to be different.”
(It also had the Winklevoss twins chasing after it for what they thought was their fair share of the pot.)
The Bay Area is notorious for generating sharp tech start-ups with backing from “a very centralized community of insiders” that produces about 80 percent of deals, but O’Donnell says that New York City’s venture capital scene isn’t like that at all. “Deals and companies fall out of the sky in New York,” he says. “The community is diverse. I think it’s much more friendly to first-time entrepreneurs. It’s really built on a meet up culture, because meetup.com is here.”
And the start-ups in New York often reflect the community. O’Donnell offers an example of a young Brooklyn company called Windowfarms that’s beginning to thrive. Based out of Williamsburg, Windowfarms sells kits that allow people to build indoor home food growing systems that hang in a windowsill. The purchase also comes with access to an online community where people discuss foods grow best in a particular area, and so on.
The market is certainly there: People won’t stop buying food. Food is also getting more expensive, and some folks are concerned about chemicals sprayed all over their grub. Others just stuff their face and don’t really care as long as it’s tasty, but that’s not Windowfarms’ clientele.
Regarding the early going for the company, O’Donnell says it sold “$200 thousand worth of kits, “and these kits were like version zero point one.” He adds, “And then the company got $250 thousand in revenue through Kickstarter, where people basically agreed to purchase it for about $150. She’s just gotten amazing traction.”
Maybe in a couple years the Windowfarms team will be bathing in a pool of organic food and cash, willing to help plant a seed for another entrepreneur with a good idea and the ability to make it happen.