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Friday, May 30, 2008

some light relief for the weekend

Ever thought of how to open the conversation to a VC, well keep this thought in mind, he is thinking, "how is this guy going to make me money", repeat, "how is this guy going to make me money". This article below comes from an article in the Sun microsystems blog "Place for Small and Medium Businesses"

How to Pickup a VC by G Kawasaki
Many entrepreneurs ask me what is the best way to open a pitch to potential investors. I'll answer that question at the end of this posting, but first let me tell you the ten worst opening lines that you can use:

You say: "I'm bright and ambitious." Investor thinks: "That's a relief because I usually invest in stupid and lazy people."
You say: "I'm a blue sky thinker." Investor thinks: "You have no business model, and you don't know how to ship."
You say: "I don't know much about your firm, but I thought I'd contact you anyway." Investor thinks: "You're a lazy idiot--why are you wasting my time?"
You say: "I love to think of new ways to solve problems." Investor thinks: "Is this a high-school science fair?"
You say: "I have lots of great ideas, but I have trouble figuring out which one to try. Let me tell you about a couple." Investor thinks: "I want to know which idea you're going to kill yourself trying to make successful, not which ideas have crossed your idle mind."
You say: "I've always wanted to be an entrepreneur." Investor thinks: "I've always wanted to be a professional golfer. So what if you always wanted to be an entrepreneur?"
You say: "I'm sure you are aware of the growing need for security. Web 2.0, Open Source, whatever." Investor thinks: "If you're sure I'm aware, why are you telling me you're sure I'm aware."
You say: "If you sign an NDA, I'll tell you my idea." Investor thinks: "You are clueless. How can you not know that venture capitalists don't sign NDAs?"
You say: "The last time I contacted you, I..." Investor thinks: "I'm going to fire my secretary for putting this clown on my calendar again."
You say: "My goal is to build a world-class company." Investor thinks: "How about you ship and sell the first copy before we talk about world-class anything?"
Now you know what not to say. Here's what you should say:

"This is what my company does..."
It's that simple. What you're trying to do is get potential investors to fantasize about how your product or service will make a boatload of money. They can't fantasize if they don't know what you do. And they don't want to be your friend, mother, or psychiatrist until they understand what you do, so cut the crap and explain what you do.



Tuesday, May 27, 2008

Know thy enemy, why do start-ups fail

This article discusses why start-ups fail, I could add a few to the list, but to keep your read short I have just included what David Feinleib who is a partner at MDV – Mohr Davidow Ventures, talked about.

Why start-ups fail

An entrepreneur recently asked me why startups fail. Startups fail because they run out of money. You’re probably thinking, “Tell me something I don’t already know!” Read on and you’ll see that statement is deceptive in its simplicity
This post is based both on my experience as an investor and as entrepreneur (when I’ve boot-strapped and venture-funded).
They spend too much on sales and marketing before they’re ready. Many venture companies move to a high burn rate too quickly and it’s hard to go back. Sometimes even a frugal entrepreneur winds up spending too much either because he doesn’t manage the money or is tempted by having money in the bank. This often happens when a startup raises too much money too early.
Other times, this occurs with entrepreneurs who are accustomed to having lots of resources. They ramp up sales before the product is ready. Of course, there’s a lot of work required to get sales early on. But a product with a truly great value proposition that delivers in a measurable way will practically sell itself. Companies that ramp sales and marketing too soon waste a lot of money.
Sometimes even when the product is great, the sales process itself isn’t understood to a point where it can be scaled: who are you selling to, how much will they really spend, and what profile of sales person does the company need to hire who will succeed at selling that particular product. All of this has to be understood before sales can efficiently scale.
Spending on the sales and marketing operations means there is no return if customers don’t bite. When you spend money on the product that work can be leveraged in future versions. (In fact, the key to effective product delivery is to try a lot of things and see what sticks.) For every venture dollar invested, I estimate that more than two-thirds go into sales costs and only a third into product development. Once you up the burn rate, there’s no easy way back.
The market outpaces the startup’s ability to execute. When you’re in a race, the only thing that matters is winning. To win a race, you have to be the fastest.
In the case of the startup in a hot sector that means how fast do you make critical decisions, hire key personnel, and manage limited resources. If, on average, you’re slower or less efficient than your competitors, you’re very likely burning more cash than they are as well. The chief executive sets the pace. If the CEO dithers on important decisions – let’s say making key hires – it slows the whole operation.
Take Company X (a composite). Entrepreneur X caught a case of what I call “analysis paralysis.” He took 14 months to hire for a key position. At Stanford, my professors would ask: “Would you choose X or Y, or do you need more data?” Students often wanted more data. The professors would chuckle and call them on it: “There is no more data.” A simple, but valuable lesson: In the real world, you rarely have a complete picture. You have to work your hunches, draw on past experience and the available information. Unlike solving engineering problems, there is no perfect answer when it comes to hiring – you need to get all the data you can through references, interactions, and simulated projects, but ultimately it’s very subjective.
There is no Entrepreneur. I know what you’re thinking, “Every startup has an entrepreneur.” What I mean is an entrepreneur with a capital “E.” Let me explain: A lot people have good ideas and some are even able to execute on them. But rare is the man or woman who can take an idea and transform it into a sharply defined product and then sell it to top-level prospective hires, investors and customers. An Entrepreneur as opposed to his lower-case counterpart is a product picker and a market visionary.
Company Y (a composite) was a startup with near-flawless execution but no clear vision. CEO Y tried his last company’s strategy and when it failed found himself at a loss for what to do. The company ran out of money and was forced to sell out for a pittance. Meanwhile, CEO Y’s main competitor was more nimble. He reacted quickly to market changes with a viable contingency plan and as a result sold his startup for many times that sum.
Without strong product and market vision, a startup will burn through cash as its team collectively struggles to define its position.
The market takes too long to develop. Often, entrepreneurs are ahead of their time. Customers are not ready to spend money on or change habits for unproven benefits. The company runs out of money waiting for the market to develop or it tries to start over, but it’s too late.
Company Z (a composite) had a compelling concept, but customers weren’t ready to buy in. CEO Z proposed a restart: Rather than sell to the market segment he was in, he would target a different market segment. As a result, he would significantly reduce Company’s Z’s sales and marketing expenses. Company Z was mildly successful with its new plan, but burned through lots of cash before it re-configured. My guess is that it will be bought for little more than the amount that’s been invested.
Risky BusinessVC’s play a high-risk game. We have to identify opportunity and risk and then accept that a certain amount of that risk will result in failure. Venture capitalists lump failures into one of two categories.
A failure like Company Z’s: A startup that struggles for reasons beyond the entrepreneur’s control. Things look good, but ultimately mainstream customers or a large volume of users were unwilling to take a chance on a new concept. Skilled execution and a reasonable backup plan won’t compensate for a market that fails to develop as quickly as originally anticipated. Some entrepreneurs are able to switch markets completely early on – if they haven’t raised and spent too much cash. But in this scenario, all companies in the given market flounder or fail. It isn’t a desired outcome but it’s not for lack of trying.
The painful failures – those that keep me and other VCs I know up at night - are the investments that fail due to self-inflicted wounds. A competitor winds up owning what turns out to be a very large market. The other company simply moved faster and out-executed.
It’s not just how fast you run the race that matters. It’s how fast the race is run. When it comes to startups, speed wins. But if you’re still early, don’t increase your burn and overspend on sales and marketing before you’re ready. Sometimes you have to slow down to speed up.

By David Feinleib



Monday, May 19, 2008

Introduction to Angel Investors (Angel Investors 101)

An angel investor or angel is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

Source and extent of funding
Angels typically invest their own funds, unlike venture capatalist, who manage the pooled money of others in a professionally-managed fund. Although typically reflecting the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc.
Angel capital fills the gap in start-up financing between "friends and family" (sometimes humorously called "friends, family, and fools") who provide seed funding, and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under US$1–2 million. Thus, angel investment is a common second round of financing for high-growth start-ups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but into more than ten times as many companies (US$25.6 billion vs. $26.1 billion in the US in 2006, into 51,000 companies vs. 3,522 companies)Of the 51,000 US companies that received angel funding in 2006, the average raise was about US$500,000. Healthcare services, and medical devices and equipment accounted for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software (18 percent) and biotech (18 percent). The remaining investments were approximately equally weighted across high-tech sectors.

Investment profile
Angel investments bear extremely high risk, and thus require a very high return on investment. Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an IPO or a trade sale. Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period. After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective IRR for a typical successful portfolio of angel investments might, in reality, be as 'low' as 20-30%. While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures, which may be too small or young to qualify for traditional loans.

Profile of investor community
The term "angel" originally comes from England where it was used to describe wealthy individuals who provided money for theatrical productions. In 1978, William Wetzel completed a pioneering study on how entrepreneurs raised seed capital in the USA, and he began using the term "angel" to describe the investors that supported them.
Angel investors are often retired entrepreneurs or executives, who may be interested in angel investing for reasons that go beyond pure monetary return. These include wanting to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs, and making use of their experience and networks on a less-than-full-time basis. Thus, in addition to funds, angel investors can often provide valuable management advice and important contacts.

According to the Center for Venture Research, there were 234,000 active angel investors in the U.S. in 2006. Beginning in the late 1980s, angels started to coalesce into informal groups with the goal of sharing deal flow and due diligence work, and pooling their funds to make larger investments. Angel groups are generally local organizations made up of 10 to 150 accreditted investors interested in early-stage investing. In 1996 there were about 10 angel groups in the U.S.; as of 2008 there are over 300, with a roughly equal number in all other countries combined; these groups accounted for approximately 10,000 individual angel investors in 2008. The more advanced of these groups have full time, professional staffs; associated investment funds; sophisticated web-based platforms for processing funding applications; and annual operating budgets of well over US$250,000. A recent development, particularly in North America, has been the emergence of networks of angel groups, through which companies that apply for funding to one group are then brought before other groups to raise additional capital.

Have a look at these groups for further information:

Archangel Informal Investment Limited UK
Braveheart Investments UK
New Vantage Group US
LINC Scotland



Friday, May 16, 2008

The in's and out's of Product Management

I track the term ‘product management’ on Twitter. You can see the results of that search term by checking out a handy tool called Tweet Scan. Essentially, whenever someone mentions the words “Product” and “Management” in a tweet, I get alerted on my cell phone by way of SMS.
I’m a nerd, but I find it interesting. And, yes - this turned in to a hella long post.
Recently, and you should see this if you look at the search results, I’ve noticed a couple of folks talk about how hard a job product management is. I wanted to make some points here about this, and hopefully put to rest reservations folks may be having about exploring the possibility of getting into the job, or maybe even continuing doing the job if they are already in the thick of it.
My take is: it’s not hard.
Now, I’m not a product manager in a big, massive company. I never have been, and if I were a betting man, I’d say I never will be. That being said, I do in fact recognize that there are differences in how product management is done at say, Microsoft, and how I’ve structured it in the past. This is just due to the nature of the size of the organization where the job is sitting.
So, keep that in mind. My take on things is really related back to 20-50 (maybe 100 or less) person organizations. Anything upwards of 10,000 or 20,000 person companies really boggles my mind. So, hopefully that’s clear.
I do in fact recall when I was first put into the role. It was exciting, but at the same time, really ridiculous. Not for any other reason than, I wasn’t working for a more senior product manager to kinda guide me a long and instruct me on what to do - I was in there on my own learning as I went. It turns out, this is ideal for me, but I recognize it’s certainly not everyone’s cup of tea.
This leads me to admission number 1: The job is damn near impossible when you first start. Actually, scratch that — it’s damn near impossible when you get 3-4 months in. This is because, at least from my experience, it takes people about that length of time to really wrap their heads around what it is they are supposed to be doing. And I believe this is where most would sink and maybe start believing, “this job is WAY too hard for me, or anyone, to really do.”
And that’s 100% true. The way the job can be defined, it is impossible for someone to excel at. If you think about needing to be “proficient in Sales, Marketing (specifically, messaging and positioning), have a strong technical knowledge, excellent project management skills, well-versed in strategic alliances, and have a good foundation in finance.” Yeah. That’s a little tricky.
Let me take some of the surprise out of this description - there is no one that is “highly proficient” or “expert” in all of these things. They just don’t exist. You will either get a “tech” person, or a “sales” guy / gal, a “marketer” or a “project nerd.” But all of those wrapped into a single individual? Yeah. Not so much.
Now, this is where people may start to get down on things. How could you possibly do a job where all of those things are important? Some may say, “this is exactly what I think it’s HARD.” OK, well hold on - I’m getting to why it’s not.
Yes. those things are important. However, in a position like this, delegating is absolutely critical. That’s why you will usually see the line about “leading without authority” associated to many product management job descriptions. Why? Well, I’ll use myself as an example.

1. Am I a marketing genius? Hellz no.
2. Am I a great software programmer? Ummm, far from it. I may know a little LISP and SQL here and there.
3. Am I great with numbers? If you asked my grade 11 accounting teacher, she would say, “HAHA. No.”
And so on.
But here’s the key - if you understand *conceptually* how these things work, and maybe more importantly, how they work together, you are doing the right thing. No one person can build a great organization - it takes teams of people to do that. So, let’s re-visit those questions above with some modifications to them.

1. Do I understand marketing and have great marketing people to work with? Yes.
2. Can I give flexible requirements and wireframes to the outstanding developers and watch them develop wicked code? Yes.
3. Can I ask the finance people I work with to help me track project budgets to make sure I don’t go wildly out of control? Yes.

At the end of the day, so long as I understand the critical nature of cohesive positioning and building brand equity and help play air traffic controller to make sure marketing can do it’s thing, I’ve won. I can completely let go and push. IE, “I can give you feedback and my thoughts on positioning this product, but I need you to write the words and deliver something cohesive.” If they don’t, that’s another issue entirely. But I think you get the idea.
OK, so that’s a big long “admission # 1″ type thing. Once you cross that functional expertise hump, admission number 2 is this: The answers are right in front of you. Sure your opinion will factor a lot into the initial product release / development / design - but use those around you to vet ideas and build some momentum (no “i” in “team,” etc…). Someone actually has to DO things, but gather feedback (at least internally if you don’t have users yet, and then put something out in to the World.
Guess what? You are going to get a lot of stuff wrong. But it’s not about right and wrong. It’s about common sense and building cohesive products. The answers are always there - you just have to know where to look and how to ask.
So, is product management hard? No. The trick is not being the best marketer, accountant, UI designer, developer, Sales person all rolled in to one. The trick is to make sure that features get built, marketing communicates them, support can answer questions, and Sales can sell.
All the job is is connecting dots and knowing where to look for the data you need to make decisions. Don’t get overwhelmed by all the noise.

Have a great weekend


The inside of a VC company or VC 101

Venture capital fund operations

Roles within a VC firm
Venture capital general partners (also known in this case as "venture capitalists" or "VCs") are the executives in the firm, in other words the investment professionals. Typical career backgrounds vary, but broadly speaking VCs come from either an operational or a finance background. VCs with an operational background tend to be former chief executives at firms similar to those which the partnership finances and other senior executives in technology companies. VCs with finance backgrounds come from investment banks, M&A firms, and other firms in the corporate investment and finance space.
Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of funds or mutual funds.
Other positions at venture capital firms include venture partners and entrepreneur-in-residence (EIR). Venture partners "bring in deals" and receive income only on deals they work on (as opposed to general partners who receive income on all deals). EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by VC firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR's move on to roles such as Chief Technology Officer (CTO) at a portfolio company. According to the National Venture Capital Association the typical individual believes that a venture capitalist is a rich individual ready to invest in a new business venture, an investment into a "change-the-world" idea. On the contrary the investors look for a high interest yielding opportunity.
The "associate" is the typical apprentice within a venture capital firm. After a few successful years, an associate may move up to the "senior associate" position. The next step from senior associate is "principal," typically a partner track position. Alternatively, there are many pre-MBA associate roles that are used solely for the purpose of dealsourcing, and the associate is usually expected to move on after two years.
Venture Capital may be a viable source of financing for a business. While they generally invest in businesses that are more established and ongoing, some do fund start-ups. In general they tend to invest in high-technology businesses such as research and development, electronics and computers. Venture Capitalists deal more in large sums of money, numbering into the millions of dollars, so they are generally well suited to businesses that are going grand from the start or have grown and require gigantic expansion.

Structure of the funds
Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.
In such a fund, the investors have a fixed commitment to the fund that is "called down" by the VCs over time as the fund makes its investments. There are substantial penalties for a Limited Partner (or investor) that fails to participate in a capital call.

Venture Capital Investing
As discussed in Private Equity Funds: Business Structure and Operations, venture capital investing involves the provision of capital to business enterprises in the early stages of the development of new products or services. Venture capital investing was especially prominent throughout the 1990s, with the boom and the subsequent collapse of speculative interest in computer and information technology, Internet and communications sectors.[6]

In a typical venture capital fund, the general partners receive an annual management fee equal to 2% of the committed capital to the fund and 20% of the net profits (also known as "carried interest") of the fund; a so-called "two and 20" arrangement, comparable to the compensation arrangements for many hedge funds. Strong Limited Partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership, and many groups now have carried interest of 25-30% on their funds. Because a fund may run out of capital prior to the end of its life, larger VCs usually have several overlapping funds at the same time; this lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely-new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know.

Thursday, May 08, 2008

Understanding Angel Financing or do you really want there money

I saw this article on VC Buzz wrt Angel Financing and it brought back sour memories of attempts at raising fincance for a project I was working on with Callum Norrie to set up a semiconductor material development company using IP from the defunct Terahertz Photonics, we were at a connect conference in Edinburgh pitching the project and were engaged with some of the Scottish angel's, it was an eye opener, I would not have used the term angel investor rather "Robber Barron", I know that may sound hard, but these guys are there to make money and they will at your expense, there are a few good guys and if interested I can share there names with you . Back to the article, it nails the different types of angel investors and the issues surrounding how an angel financing works. This is a must read for anyone raising an angel round. I wish you luck in raising future funding in these hard days, but if you have a good product / service , a route to market, customer commitment, and a seasoned management team, you can still raise cash.

Angel Financing by Todd Vernon from http://www.lijit.com/

In a few months Lijit Networks will be two years old. We started the company in a fairly common way, finding employees that wanted that "ground zero" experience, having the seed of a good idea, and finding Angel Investors that would invest and keep the idea alive long enough to germinate. It wasn't easy but we got it done. A question I get a lot from new entrepreneurs is "how do you find Angel Investors?"

Many young startup entrepreneurs tend to look at Angel Investors as a group of people with more money than sense (which sometimes is true) but generally not. They give no thought to the motivations of their Angels, what their Angels should get from the relationship, or simply why the Angel should be interested in investing. Like anything, understanding your audience is half the battle. Don't trivialize your Angels Investment by rationalizing the money isn't important to them; I find that $25K is important to everyone.
I have been on both sides of the Angel Investment table. Lijit was Angel funded for the first year of its life. We raised approximately $900K from a combination of friends, family and seed professional investors. On the flip side I have made several Angel investments in other local companies – with varying success. Based on this sample set plus other random data I have collected along the way, I have established a basic way to look at Angel Financing.
Types of Angel Investors:
The Family Investor: The Family Investor is likely not really a classic Angel Investor at all but rather a supportive family member that "knows you". Their motivation is likely out of support (sometimes guilt), but their basic investment thesis is they trust you. For me these are the worst type of investor because you likely have intimate knowledge of their financial situation and whether or not they 'should' be investing. Likely, they have no inherent feel if your idea is good or not, but may have changed your diaper at one time or another and have overcome that experience to hand you a check for $25K or $50K. Personally, I like this category of investor the least because the investment is totally emotional and personal – and that sucks in business. But based on the financial situation of the individuals involved and the relationships this can work ok if everyone comes into the situation with their eyes open, but go out of your way to make sure.
The Relationship Investor: The Relationship Investor is probably one or more co-workers from a previous gig or business friends you have known for a while. They may or may not understand what your new company is doing but they have had a track record working with you. They want to be supportive, but are looking for a return. You won't lose them as friends if things go bad, but the investment for them is likely not 'trivial'. In my experience these are good Angels to have, again as long as their eyes are open going in. These people can also be wildly supportive of you in terms of finding employees and other resources.
The Idea Investor: The Idea Investor is probably very familiar with the space your company is targeting. These are in some ways the very best types of Angels because to some degree they validate your idea. There investment is based on the Idea and there is little emotion around the table (always good). If you can get them onboard they can open doors into partner relationships and just generally good advice. You will spend most of your time convincing the Idea Investor that you and team are the right people to attack this problem (as they likely don't have a strong relationship with you or the team). Often an influential Idea Investor makes a good early board member for the company.
The Once Removed Investor: The Once Removed Investor is likely connected through a personal or professional relationship with either the Relationship Investor or the Idea Investor. They likely don't know you, and they likely don't have a clue if your idea is good or bad but they have translated the trust in the investment to the person they know. This is a great way to get additional Angel Investors onboard, but without a solid Relationship Investor or Idea Investor it just isn't going to happen.
I personally have never seen an Angel Financing come together without some mix of the first three investor types plus a few Once Removed Investors. Be warned that the Once Removed category of investors will also supply the softest money in the upcoming financing. Simply put - as you verify amounts before close, the Once Removed guys are the ones that tend to "go away" or "get smaller" as the deal progresses. A friend of mine that has successfully financed several companies gave me the rule of thumb that most investors will end up being about half of what they initially committed to. This is definitely true of Once Removed Investors; I once had a $400K guy turn into $50K guy, and $50K was like pulling teeth.
Finally, there is a concept I refer to tongue-in-cheek as the Arc Angel. An Arc Angel is a Relationship Investor or Idea Investor that has a track record of success making other Angels (and perhaps non Angels) money. These people are valuable as they can be very influential attracting quality Once Removed Investors. If you can find this person and get them excited about your deal, do it.
The bottom line on Angels, spend your time looking for solid Relationship Investors or Idea Investors, they are the ones that will get you over the hump. Bring a few Family Investors along for the ride if they won't get sick on the Rollercoaster and hope that you can mix in a good set of Once Removed Investors.
Size of Investment
Next, you have to consider the size of the investment. Money never goes as far as you think it will. My experience is you need to raise between $500K and a $1M to do almost anything. Using Angel Investors to achieve this goal you are likely looking at investments all over the board but usually in the $25K to $100K range. You may have a few smaller and a few larger but in my mind you have to target having no more than 10 to 15 total investors in an Angel round. It's just too hard to herd the cats when the group gets larger than this.
Pre-Money Valuation
A friend of mine with much more experience then myself told me, Angels should get a good deal. They are putting money in at a time when presumably no one else will and they are taking a huge risk. I can't tell you how many people have said, "Yeah, but its only $25K and they have lots of money". That's total bullshit; show me someone who lights $25K on fire for no reason.
Having been on both sides of these kinds of deals, I totally agree that Angel Investing is very high risk and the road ahead as an Angel is fraught with investment disaster. Lots of wonky things can happen to the Angels when VC's come into the company including investment preferences that take away the Angel Chocolaty goodness. I have also, unbelievably, had meetings with entrepreneurs where they are indignant I won't accept their pre-money valuation on their imaginary business. I always tell them the same thing, if my money is so unimportant, do it with yours. If you feel compelled to twist the valuation screws do it in the A round with the professional investors.
Investment Mechanism
There was a period of time where nearly every startup was doing convertible financings. This is where as an Angel you invest as if the investment is a debt type financing but can convert to an equity investment based on some outcome or the will of one party or the other. I tend to think these deals kind of suck. They are usually setup to attract money fast, and often in the case of the entrepreneur are empowering some kind of fantasy that the investment could be paid off based on success of the company and he won't need to give any equity away. As an investor that's the last thing I want because that just turns my investment into a very high risk bank account. The only time I saw this work well was a company that had plenty of investors around the table and incented them to invest early to get the company jump started faster. Early investors got some warrants to make it worth their while to have their money show up to the party sooner (and deal with the risk of being the first money in). Just skip this stuff, get all your Angels aligned, do one close, and make it a pure equity round. If you aren't ready to sell equity in your idea, finance it yourself.
With the exception of possible investors in the Family category, Angels are not in it to finance your dream indefinably. You would not think it to be the case, but I have had several conversations with people approaching me for Angel investments who simply could not articulate how I would ever get any money back. They were so focused on getting money from people they forgot 'they are an investment', and investments have terms. Almost without exception, I don't want to own your dream, I want to make money and have a little fun along the way. If you never sell the company, I never realize a gain.
There are probably 5 more posts I can do on this subject but my goal was simply to put together a primer on this subject. So many people approach me not understanding the dynamics of early stage financing. Brad Feld has written good stuff in this area on his blog as well as some quality stuff on AskTheVC. Use these resources to understand the numbers, but don't forget to understand the motivations.

Slainte Gordon

Thursday, May 01, 2008

A must read for the Entrprenure wanna be

A must read for the Entrepreneur wanna be:

I have worked with Founders from a lot of varied backgrounds, pure academics, research scientists, and the very rare experienced business person, all have there own philosophy on how to start a business and run a business, I have an important statement "You do not know it all" and "your point of view is not the only correct one". I have sat around numerous meetings early mornings, late nights and long haul flight meetings and listened to them declare there point of view with a level of arrogance only Kings and Queens and the President of the USA should only be making, oops !!!I forgot to mention the venture capitalist as well, well you are spending his money to test your pet theory and fix your problems, so the £xx0m you have spent so far of his money can give him the right also.

I used to be in this camp my way is the only way, but I have learned that I usually hire smart people , who are better at some things than I am, and pay them a good salary , so let them be what you hired them to be, and listen to there input, weigh it and then implement what is the best solution not your solution, it maybe the same as your original thought, but you will have a consensus amongst the team who will be tasked to deliver, that will bring a permanent productivity boost you would never get handing out £10k salary increases.

I found an interesting article by Wil Schroter who is the Founder and CEO of the Go BIG Network , he tackles some of these issues in a refreshing manor, which may bring a smile to your day. I see a few faces pass before me when I read his opening remarks, Alex Mackie, Jock Holliman, Barak Maoz , Soren Hein, all solid VC's. Have a good read.

Your Equity Isn’t a Payment, it’s an IOU

Hello there young entrepreneur, I’m your investor. Remember me?
I’m the guy that sat in front of your heartfelt and emotional presentation to raise capital for your business. I listened closely to your entire plan, and made a few comments about what I didn’t think would work. You of course ignored my comments and assured me that with the right amount of my money, you’d be able to solve all of your problems.
I wrote you a check, you spent the money, and those problems haven’t gone away.
So aside from all of your promises of future riches, you haven’t paid me back. And, you know, the reason I wrote you that check was to create more money than I started with, which hasn’t happened.
You see – giving me equity in your company wasn’t a payment, it was an I.O.U.
Your Currency is Worthless
Giving up that equity may have felt like a payment. You may have felt like what you were giving up was an actual asset that had real value. We signed agreements and created a currency that was backed by your promises and intentions. I swapped my currency for yours. Now yours is losing its value - fast.
You may have thought those promises you made were going to be forgotten about or displaced by other promises. In fact they weren’t. Unlike the currency I gave you, I couldn’t spend your promises to hire my friends, find a fancy office or buy everyone new laptops. But you did.
Now I’m stuck holding the bag with the useless currency you gave me while you’re out trying to print new currency with even more promises. I’m sorry, I’m not buying it.
Remember these Guys?
Perhaps you may have forgotten about our arrangement, but maybe you’ll remember these guys – your employees. What? You don’t? Allow me to jog your memory.
You may recall an evening over more than a few beers when you convinced them to quit their existing jobs to go work for you. You told them that even though they would be giving up a steady income with an existing company, the money they would make from the stock options you gave them would far outweigh the risks.
They went back to their families and took your sales story with them. They convinced themselves and their loved ones that the opportunity you had for them was real. Soon thereafter they were missing family dinners, soccer games, and any time they ever had with their friends. They were pretty confident that you’d make good on that little I.O.U. you created after that last beer.
Just like me, they seem to be wondering what happened to all of those promises. They’re wondering how you expected to pay them back for all of the investments they have made in you. By now they’ve figured out that no return is going to pay them back for the time they’ve lost with their friends and family, but they sure would like to think a payout might help them create some more time in the future.
We’re Not Done Here
Maybe somewhere along the line you forgot the basic mechanics of an exchange, so let me re-educate you. When I hand you something of value, in order for the exchange to be equitable, you need to hand me something back something of equal or greater value. Unless we finish the exchange, which involves you giving me something of value, we’re not done here.
In fact, unless you give me something back at all, it’s not even an exchange. It’s probably not theft but it’s certainly not charity, and I’m not feeling like Santa Claus right now, so it ain’t a gift, that’s for sure.
In order for us to complete this transaction, and in order for you to make all of your debts right, I need you to fulfill your promises. I need you to dig down and find all of the energy, enthusiasm and focus you had when you accepted my check and think about getting that money back.
You’re not Alone
Although times are tough and you’re feeling the pressure, you may feel like you’re the one with everything to lose. Truthfully though, you’re not alone. You may be the most visible person in this transaction, but if you quit on us, we all lose.
It took all of us to start the exchange and write that IOU, and it’s going to take every one of us – your investors, your employees and even your customers – to make good on your big promise to us.
We realize that you need us as much as we need you, so we’re here to support you in any way you need us to. We just ask that you don’t forget about us, because we can absolutely assure you – we won’t forget about you

Slainte Gordon