Startups raise money in rounds, often taking on multiple investors per round. Here's how the major types of funding work:

Venture capitalists

• A VC firm raises funds from investors, then invests it in startups, usually at upwards of $1 million per company (and sometimes as high as $12 million or more).
• A VC firm is buying a share of the company — anywhere from a tenth to a third, depending on how much the firm decides the company is worth before the investment.
• If the company needs more money a few months later, the firm may invest again, or a different firm might invest. Companies often raise funds from multiple firms in one round.
• VCs want at least three times their money back, though they expect most deals to fall through
• Many companies only take VC funding after they've used up the funding from their...

Angel investors

• These are often the first investors in a company, most always used before venture capitalists.
• Angels invest a few thousand dollars. As with VCs, several angels may invest in a startup at once, for a total round of anywhere up to about $1 million.
• They have less of a business interest but more emotional involvement.
• Angels can be friends and family of the investee, but some startups raise a preliminary friends-and-family round.
• Or they may go even smaller and rely on...

Personal credit

• When is it healthy to run up a 20%-interest-rate debt on plastic? When it's cheaper than running up a 200%-interest-rate debt on VCs.
• Of course, you could also rely on your own cash reserves, as many startuppers do with their second companies — Evan Williams, for example, who used his windfall from selling Blogger to Google to buy out the investors in his new company, Odeo.
• Ironically, credit card funding is a far cry from other way to borrow from banks...

Hedge funds

• The 90s bubble was partly blown up by VCs, but the big money came from hedge funds — an adventurous form of private investment fund.
• They're not as involved this time — the money's too small, at least for now — but they powered many a startup in the 90s, when more tech-savvy VC firms hadn't dominated the Silicon Valley funding industry.

So why are startups avoiding VCs? Because they're finding that angels, friends and family, and personal credit are less demanding funding sources, with lower expected returns, giving founders the freedom to take it slow and stay in control. Of course, VC money is hard to resist after a year of bootstrapping and dining at McDonald's.

For Start-Ups, Web Success on the Cheap [NY Times]

I'm poking around into the weeds at the side of the road looking for a "Web 2.0" (don't—just don't) startup to get rich in, preferably in six to eight weeks. Any leads?

Good question, Broad. There are several routes to dot-com success, all following an archetypal pattern: the Dirty Rotten Scoundrel.

Stage 1: Pick a startup

• Find something carpetbagging VCs are salivating for and will pay you cash for. "Citizen Media" is hot this month, what with the $1.65 billion YouTube buyout and Sequoia Capital's $5 million investment in PopSugar. That'll put you in Content Land, a magical place where companies get millions but spend pennies on bloggers (who, thanks to a weak dollar, are cheaper than Chinese World-of-Warcraft gold farmers).
• Or for a technology bid, play with buzzwords: Ruby on Snails, Abuser-generated content, Anti-bacterial Ajax. The stupider the phrase, the more exciting the business — after all, no competitors!

Stage 2: Grab the cash

• Shop for gullible investors. Smart ones will turn you down. Venture capitalist Paul Kedrosky, for instance, answered the reader's question with "Buy a tri-state lottery ticket."
• One way to find these investors is to look at other silly startups and see who paid them millions. Which distracted investor at Y Combinator invested in Kiko despite the plethora of other, better web calendar startups?
• Or run a blog search on Technorati for the phrases of an investor who's caught the fever: "__ doesn't get it" is the best mark of a true believer, but also look for "we talk through blogs" (the notion is pretentious and the use of we shows the writer thinks Web 2.0 is a club) and "Web 3.0" (especially if your startup works on mobile phones or 3d).

Stage 3: Hit the circuit

• Stirr, SF Tech Sessions, SF New Tech, SV New Tech, SF Beta — you could not only schmooze every night of the week, you could demo your site to hundreds of young VC associates, biz-development pros, and flacks.
• Pick a persona: regular Joe who had an idea in the shower, bold innovator in the model of Google's Sergey Brin, or nerdy engineer (minus the anti-social part, unless you have a wingman to "force" you to meet investors).
• Your conversation partner is having a gin and tonic. You are having a Sprite — either discreetly order so no one knows you're the only sober one in the room, or always take your car. "Just a soda, sorry — driving."

Stage 4: Grab the cash, part 2

• This stage is a great option if you skimped on Stage 2. Bootstrapping your own company means you can find a buyer and keep the money for yourself.
• You did remember to weasel out of promising your partners and employees any money, right?
• Repeat after me: "My financial advisor advises me to decline a vesting requirement." Substitute with "attorney" or "yoga instructor" as necessary.
• No, you can't sell to Google. They may know how to buy a company like Dodgeball or Blogger and let it rot, but even a lousy purchase has to look great at first. Can you really fake it that well?
• Two words: News Corp.
• One word: Viacom.
• You can't have your funding and eat it too — it'll be damn hard to find a gullible investor and a gullible buyer, and all the paperwork will become evidence when your scam is finally uncovered.

Stage 5: Run away!

• Cook the books, open a secret account, transfer the money and book it.
• Exit strategy 1: Mexico.
• Exit strategy 2: Russia.
• Don't even think about it: New York City. They may be even more nuts over dot-coms out there, but they're all hucksters. You will be the soft guy with the money, and a mob of ravenous bloggers will sink their jaws into your larynx.

Of course, Valleywag's commenters will have their own evil ideas for netting a quick million or two. (Won't you, kids?)

Peerflix has a simple business model: Charge users a nominal fee to trade DVDs or CDs, pocket a buck per trade, and build volume. So how much should it cost to pull such a site into profitability? Maybe two million bucks? Not for Peerflix.

[CEO] Mr. McNair said the company in late 2004 raised about $2 million from the venture firms 3I and BV Capital.... That cash would have been more than enough to last until mid-2006, Mr. McNair said, but Peerflix raised another $8 million in October 2005.... More money is on the way.

Now how could this company spend more than $10 million in three years? Is this site that far from running on its own revenue? Of course not — the math below shows why Peerflix should already turn a profit, making it a bad idea to take VC money.

Boring arithmetic begins
Run the numbers: The Times says Peerflix makes two bucks (one per user) per trade, and users are making 5 trades a month. Peerflix boasts 250,000 members. Using the industry rule of thumb for free-registration sites — 1 active user for every 10 registered accounts — that means 25,000 users are making a total of 125,000 trades a month. Even if Peerflix is padding their numbers (they are), they should be pulling in at least a respectable $200k a month — $300k if you count the part spent on shipping costs.
Boring arithmetic ends

$3.6 million a year is fantastic for a little startup with $2 million invested. But for a company that took $10 million, it's nothing special. The CEO shouldn't be bragging — he just gave away more control of his company for no good reason. If Peerflix expands (into CD and book trading, for example) after getting this money, the venture capitalists own a hefty chunk of the new business.

Why did Peerflix take the money? Maybe they plan to expand but don't have the guts to bootstrap; maybe they got greedy; maybe the smooth-talking VCs tricked them into it. But now Peerflix is just another in a long line of startups diluted by wasteful VC money, ruining a perfectly profitable idea.

I'll Trade You My 'Titanic' for Your 'Spider-Man' [NY Times]

Why so quiet, Feld?

Feld Thoughts [Feld's blog]
Tech Bust's Last Chapter Plays Out at VC Firms [Wall Street Journal]
Photo by Steve Lacey [Flickr]

— Beth Gottfried

The usual names are named — the venture capital firm Draper Fisher Jurvetson, Kleiner Perkins VCs John Doerr and Vinod Khosla. Missing are the Google co-founders and a few other players. But anyway, why do these players suddenly want to throw green at Green?

• Green looks sexy. This year, Al Gore managed to turn a Powerpoint Apple Keynote (thanks, reader Jordan!) lecture into two hours of entertainment. That's as sexy as environmentalism will get, post-Greenpeace.
• Green gets government money. Congress may finally put decent money toward clean-fuel efforts. And government contracts turn green into gold. (Note: When writing about environmentalism, journalists are required to use every possible "green" cliche.)
• Green doesn't have to be too green. Plenty of investors, including Khosla, are betting on ethanol as the fuel of the future. Thing is, some say ethanol is just as crooked a game as oil, and it's only a temporary fix. There's nothing a good tech mogul loves like planned obsolescence.

Green tech's growth [Mercury News]

At a pizza-and-beer party attended by youthful software writers and would-be CEOs in Seattle in late May, venture capitalist Greg Gottesman arrived in a smart white jacket that turned some heads. He looked like "he was about to attend brunch at the yacht club," said one attendee. Mr. Gottesman of Madrona Venture Group admits that in hindsight, the jacket was a mistake. While he thought the event would be a small affair, "I got in there, there were 500 people, it was 1,000 degrees, there was beer all over the place," he says. "It wasn't a great place for that jacket."

Mr. Gottesman, 36, says he doesn't think his attire "ruined his street cred" with the young crowd. "I did have a beer and a piece of pizza in hand," he notes.

That's it, Greg, you did all right! They'll totally let you into the Junior-Senior banquet!

How Venture Capital Is Trying to Get Down With Young CEOs [WSJ]

1. Check the numbers: Digg rejects Weblogs, Inc. Long before Kevin Rose's social news site reportedly rejected $40 million from Yahoo, Rose (pictured) rejected $4 million from Jason Calacanis, owner of blog network Weblogs, Inc. Did it seem like a great deal? Sure, until Rose examined the deal more closely. If he accepted, he'd give up control of Digg — and only end up with one million bucks, all said and done. Now, with Calacanis launching his own social news site at AOL's Netscape, Rose has no reason to worry — Digg's about to launch a souped-up new version to blow Netscape back out of the water.

2. Don't get cocky: Facebook rejects Yahoo This failed deal (only reported here on Valleywag may have been the last hope for Facebook. The school-based social site needs a buyout or IPO to pay back some heavy venture capital investments. With a growing staff bringing high operating costs, and sparse ads and partnerships on the site, Facebook is nowhere meeting the newer, more rigorous standards for a public offering. So when Yahoo offered a reported $1.4 billion buyout, why didn't Facebook jump into the arms of its white knight? Because someone in charge — at this point, probably the VCs — is holding out for $2 billion. Will anyone offer that before Facebook's old and busted? Don't bet on it.
3. Don't burn the bridge: Chris Pirillo rejects Microsoft Just a few months ago, the already-successful tech pundit Chris Pirillo eyed Microsoft as an employer. After some interviews, Microsoft made an offer to the former Tech TV host. Their price was too low, but the affair ended amicably — Microsoft is still the major sponsor at Chris's annual tech conference, Gnomedex.

Spend all that new money, of course. While the amount that True Ventures gave Om is undisclosed (for now), one source says it's "enough to hold him over for a couple of years."

Usually, that's what ad income is for. And it's unclear just how Om's ad provider, Federated Media Publishing, feels about not being able to pay Om's bills.

Especially since Om took venture capital. As any startup burnout can tell you, VCs often want two to five times their investment back. That's hard to do with a content-based site (which is why Jason Calacanis and Nick Denton funded their blog networks with their personal fortunes). It also means that in a few years, Om could feel the pressure to sell his blog. (Or, heh, go public, but let's hope the bubble pops before then.)

But who can blame him? For a Valley journalist, it's no fun to see all your friends take millions while you pull in a five-digit salary. Have fun, Om, and don't worry about the due date on that money.

It's time to transition [GigaOM]
Earlier: Scoop: Blogger Om Malik quits Business 2.0 and takes funding [Valleywag]
Photo: Om [Agendacide on Flickr]

Have you ever read the Sandman series by Neil Gaiman? VCs, we're the demon princes. The old guard, Lucifer and Beelzebub, are retiring, and the rest of us, in all our weird shapes, have our own power struggles. We're jockeying for our place in hell.

But an army of other VCs — Bill Bowes of U.S. Venture Partners, DFJ founding partner Tim Draper, Asset Management founding partner Franklin Johnson, and others — are fighting to keep univeral preschool out of the Valley. Their sticking point: the existing school system needs fixing first.

Why spend millions against the measure? (Bowes donated $500k, Draper spent $96k) Why not put that money toward the supposedly failing K-12 system? Who knows?

But the VCs have a point — these kids would all drop out of preschool anyway, to run their startups.

[Valley cash opposes preschool initiative [Mercury News]

Joe Schoendorf: [Mr. Schoendorf is a venture capitalist with Accel Partners.] ...So we have to ask ourselves, 'Who's the next Intel; who's the next Apple; who's the next Google?'

John Doerr: [Mr. Doerr is a venture capitalist with Kleiner Perkins Caufield & Byers.] If you're saying a new player is going to displace Microsoft or Google in the next five years, I just don't see it. I think Google will be the next Google.

Just so you know? Doerr was one of the VCs who took Google public.

Steve Jurvetson: [Mr. Jurvetson is a venture capitalist with Draper Fisher Jurvetson.] Will there ever be a new Google?

Doerr: I hope so, but it might not be in information. It might be in entirely new fields.

Ann Winblad: [Ms. Winblad is a venture capitalist with Hummer Winblad Venture Partners.] Who's the new Sony?

Doerr: Samsung. It's already happened. Sony bought Samsung.

(Actually it didn't. Not even metaphorically.)

Winblad: So it's not Google?

Pardon, what? How does this even make...what?

After the jump, it just gets worse.

Moderator Tony Perkins speaks up:

Perkins: But Steve Jobs has been a pioneer in user interfaces. I project that in three to five years Apple's music distribution dominance via iTunes and the iPod will have faded; it will have become the fifth or sixth player.

Doerr: Uh, wait—because, because, because?

Perkins: You can make fun of me John—

Damn, I was supposed to get permission?

—but I say this because it's a closed, proprietary system, and what my kids want is to be able to download music and share it with friends. [boring stuff removed]

Doerr: But you're projecting that Steve and the team at Apple are not going to be smart enough over time to serve that market.

Perkins: Well, unless they adjust ...

Schoendorf: You're also assuming that everybody else is going to suddenly figure out that market, but there's no sign they've even started.

Perkins: Everybody's in the business.

It's then that Jurvetson requests a show of hands to counter Tony Perkins. Tony, ever the gentleman, tells his persecutors, "Okay, we'll see. We'll invite you guys back." That's right — those MC fees make all the abuse worth it, don't they, Tony?

Gluttons for punishment can hear ZDNet's podcast of the talk.

Finding the Next Google [AlwaysOn Network]

With the posting of the millionth article about Buck's Restaurant (this time in the Seattle P.I.), the Silicon Valley pancake house is now officially in a new golden-brown age.

And the popular restaurant needs the ultimate sign of privilege: a bold-name-spotting map on par with Mediabistro's "Lunch at Michael's" feature. Yes, we need an alliteratively joyful "Breakfast at Buck's."

But Valleywag is currently, well, underrepresented in the town of Woodside, where the VCs flock from Sand Hill Road for Buck's pancakes. So Valleywag needs a weekly Buck's correspondent with a sharp eye for important people and a sharp tongue for telling who's meeting with whom. Be the reigning gossip of Woodside — e-mail tips@valleywag.com with the subject "Buck's reporter" to apply. (Link to your blog if you have one.) Because when Jurvetson orders the Spanish Omelet, you'd better pay attention.

Venture Capital: Silicon Valley's startups booming [Seattle P.I.]
Buck's of Woodside [Official site]