The Oscar-nominated movie, The Social Network, tells a tale of greed, ego and the trappings of success as it chronicles Facebook’s early days of invention. The story of how wunderkind Mark Zuckerberg hatched the world’s most popular social media site in a Harvard dormitory has encapsulated a generation’s fascination with technology.
It also has had the unintended effect of promoting entrepreneurship. "It has made startups mainstream," says Mohammed Al Adham, co-founder of TwitVid, a service that facilitates the sharing of homemade videos through social media sites such as Facebook and Twitter.
Popularity of The Social Network has given Al Adham and partner Adil Lalani a legitimacy that they say didn’t previously exist outside of Silicon Valley. It could not have come at a better time for a media platform that its founders say attracts 10 million monthly visitors. With the company pursuing a second round of funding, Al Adham and Lalani suddenly found prospective investors asking, "So, you’re doing this thing like ‘Social Network’?"
Al Adham and Lalani have no idea whether TwitVid will morph into another Facebook-like sensation. But as they make pitches to interested investors, they have come to typify the path taken by many high-tech entrepreneurs: Al Adham and Lalani have had to supplement their deep technical know-how with self-taught business acumen to survive in a competitive arena where a good idea is just one factor for success. "When I started out I had no idea what entrepreneurship was," says Al Adham, a 26-year-old Jordanian Canadian. "I didn’t know there was a term for it."
That Silicon Valley Magic
Al Adham and Lalani’s road to Silicon Valley followed a similar one as Zuckerberg’s — except without alleged betrayals, multiple-million-dollar lawsuits and dropping out of college. It began in 2007 at the University of Waterloo in the Canadian province of Ontario when Al Adham filmed Lalani playing drums in a dorm room. When encountering problems sharing a copy of the video through the Internet, the software engineering students invented a solution.
They realized the technology they created had potential market value, so the students spent the next five months trying to figure out what to do with it. "Should we raise money? Should we turn it into a product?" recounts Al Adham. "Then we heard about this Silicon Valley magic, all the different companies getting funded. So we just decided to find out."
In 2008, they bought one-way tickets to Northern California and slept in the basement of the home of some friends. The entrepreneurs began networking, meeting such Valley dignitaries as Plug and Play’s Saeed Amidi, the CEO of a well-known startup incubator. Within four months they received seed money from some angel investors to launch EatLime, Inc. The initial resources allowed the men to develop their product through trial and error. They went through five stages. "And it is important to remember each one of them failed," says Al Adham.
But they never gave up. The stubborn entrepreneurial streak has served them well as TwitVid gained popularity almost from the start, in 2009, after two years of perfecting their patented instant media engine that they say delivers the fastest possible upload of video. The site now has such celebrity members as Justin Bieber, Britney Spears, Dane Cook and Tony Hawk.
The company’s first major break came early last year when it got a round of funding from respected venture capital firm Draper Fisher Jurvetson and the founders of Maktoob, a Jordanian company known for being the first Arab and English e-mail service, which has since been bought by Yahoo!
Al Adham describes this phase of a startup as experimental with a budget of up to US$2 million over 10 months. It allows entrepreneurs to find their niche and set off in a specific direction. At the end of last year TwitVid reached the juncture where it needed a second investment round to continue growing. Generally, the next round, known as ‘Series B’ funding, would generate between US$4 million to US$10 million.
That’s a big range. Startups must weigh many factors to determine the right amount to seek. For starters, venture capitalists usually demand about a 20% equity stake in early-stage portfolio companies. The dilution of control probably will continue with new funding rounds. As a result, entrepreneurs need to tabulate exactly how much cash they need to attain a specific milestone that could increase their company’s valuation. They want to give up the least amount of equity while raising the most amount of capital.
"You have to set out some operational benchmarks of what you think you can accomplish during the first 18 months," says Wharton finance professor David Wessels, co-author of the book, "Valuation: Measuring and Managing the Value of Companies."
Wessels notes the milestones must be related to marketing, not product development. "How large are your biggest customers? How many users do you have? How much profit per use is coming in? How much revenue is being generated by users? These are the critical questions from round to round that people are going to look at," he says.
The Fundraiser’s Exam
The process for Al Adham and Lalani began in mid-January; they hope to secure new revenue sources for TwitVid by late spring. At this stage they are armed with tangible proof of what they’re doing. TwitVid comes with a certain cachet because of the site’s growing numbers and celebrity status. But the entrepreneurs face the same anxieties as any startup seeking money. "It’s like exam time when you go for fund raising," Al Adham says.
"You don’t just tell them what you’ve done so far but you tell them what you’re going to do with the money you raise," adds 24-year-old Lalani, whose parents are Indian and Pakistani. "The first stage is experimental. You can play around. Now, let’s get serious."
Wessels describes the staging of investing like an option agreement. "If you just can’t reach a milestone that you committed to, that’s the end of funding for your idea," he says. "Then the investors walk away."
Fern Mandelbaum, a partner with Monitor Ventures, an early-stage venture capital firm based in Los Angeles and Palo Alto, Calif., has spent years guiding entrepreneurs through the minefield of venture capital investment. Mandelbaum agrees with Wessels about the importance of having a sustainable business model. "For the most part, people want to know how you are going to make money," she says.
"The metrics of importance will vary from company to company, but the focus on execution goes up," adds Anand Sanwal, CEO and co-founder of CB Insights, a venture capital and angel investor data company based in New York. "Of course, vision, strategy and market opportunity remain important, but the premium on execution and traction goes up."
Wessels says lessons can be drawn from The Social Network because, according to the movie, Facebook’s founders were driven to reach tangible milestones. "It allowed them to work backward to think, ‘How many people do we need to build this business? How many programmers do we need? How much server space do we need, how many sales folk do we need? That gives you an idea of some fiscal planning," says the Wharton professor.
It’s not easy to predict how any startup will fare in an ever-changing environment such as technology. Twitter, the popular microblogging service, has an estimated 200 million users worldwide. It has been called revolutionary for allowing protesters to disseminate information during news media blackouts in Iran, Egypt and Tunisia.
Late last year Twitter completed a round of funding for US$200 million and recently has been given a US$4.5 billion valuation. And yet the financial picture remains cloudy, as Twitter’s executives try to create a viable business model that turns the company into a moneymaking machine. "What we still have yet to prove is that we can build a very successful business on top of this," co-founder Biz Stone told National Public Radio’s Terry Gross.
Twitter’s business situation is complicated because of independent startups creating applications for its service. The secondary startups also are trying to develop sound business models. One noteworthy example is UberMedia, which owns popular Twitter apps for the desktop, BlackBerry, Android, and iPhone.
It recently announced it had raised US$17.5 million from Accel Ventures, and according to reports is trying to buy TweetDeck, another successful Twitter application. UberMedia seems to be trying to figure out a way to make money off the millions of Twitter users, and that could put it in direct competition with Twitter.
In February, Twitter suspended UberMedia’s three applications for allegedly violating its use policies, but reinstated them a day later after noting on its blog "that steps have been taken to remedy the violations for these applications."
Sanwal has found investment in Twitter-only applications subsiding. "Entrepreneurs and investors have realized that not being wholly dependent on any platform is beneficial," says Sanwal, a Wharton graduate. "Specifically for Twitter, some of the angst amongst developers, entrepreneurs and investors has resulted from uncertainty that Twitter itself had initially fostered."
The fluid situation is educational for TwitVid’s founders because they originally built an app for Twitter. It’s not enough to attract money; they need to sign with the right investors. "You want smart money," says Al Adham, who with Lalani created a target list of up to 30 venture capitalists, some they already knew through the Valley’s expansive networking circles. "You want people who can sit on your boards, give you feedback, and guide you through things. Mistakes become more expensive now."
From Mandelbaum’s perspective, it’s all about the right match. "It’s way, way beyond money," she says. "It’s so much more about their advice, their connections. They’re on your board; they can fire you. You’ve got to think really hard about who your investors are. They own 20% of your company."
The Next Phase
The next phase of funding probably will lead to many changes for TwitVid. While it has a home base in San Francisco, the founders have relied on a virtual team of engineers mostly from China and Russia. Now, they expect to open an office with workers to better ensure accountability and show new investors what they’re doing. "You can’t outsource the rest of your life," Al Adham says.
The operational considerations highlight the need for entrepreneurs with business backgrounds. The ideal combination for a startup might include a business-oriented founder coupled with a technology expert. But TwitVid was created in a dorm room by two software engineering students, a typical scenario for these types of enterprises.
Yet, Al Adham and Lalani are not tech geeks. They are smart, charming and prepared. In the best of the entrepreneurial spirit they gained a business savvy through books, talking to advisors and using Venture Hacks, a website dedicated to helping the uninitiated navigate the maze of Silicon Valley investing.
Mandelbaum says the biggest factor in attracting big money is the entrepreneurs themselves. Many startups offer good ideas but lack a dynamic team that excites investors. "That is what people will bet on," she says. "It’s not enough to go in and say this is the next big platform play. It’s about, ‘What is their vision?’ "
Anyone who has met the Canadians knows the answer. Al Adham and Lalani exhibit passion in their product. Fadi Ghandour of Jordan, a founding partner in Maktoob, invested early in TwitVid because he believes in Al Adham. "Social media is driving the web," says Ghandour, one of the Middle East’s best-known entrepreneurs. "Who is going to make it out of those solutions, is something else. Who knows?" But TwitVid, he adds, is "one of those companies that are actually going to make it."
For all the focus on funding, the Canadians like to talk about a noble purpose for their enterprise. They are nimble enough to keep improving TwitVid while considering how it might fit into the future. Lalani hopes TwitVid becomes a staple in people’s lives as they rely more on smart phones for taking videos of birthday parties, graduations, weddings and other important events of family life. "We need to provide the service for you to capture those moments and share them with your friends," he says. "This is the way people are going to live in the future."
When they launched their startup it made sense for Al Adham and Lalani to associate with Twitter, which celebrates its fifth anniversary this month. But TwitVid also is compatible with Facebook and other social media sites. It soon will work with smart phones. The expansion beyond Twitter has resulted in a predicament: Do they change their catchy name that is being used as a verb on Twitter? Or do they re-brand to underscore the breath of their applications?
"The longer you wait with anything, the harder it is to change it," Mandelbaum says. The men aren’t sure. "It’s like you’re re-inventing business as you’re trying to start up a company," Al Adham says. "It is an experimentation period for us right now. We don’t know."
Whatever happens, the co-founders are in no hurry to sell the company. They’re having too much fun dabbling in media, video and celebrities to think about the financial rewards they someday hope to reap. But Al Adham has created a vision of how it will turn out. He wants to oversee a big firm that is community-oriented. "Like Microsoft," he says. "That’s my dream."