Last chance to vote for ShopSavvy!
January 4, 2009
Today is your last chance to help ShopSavvy win a Crunchie for Best Mobile App of 2008. How about it? One more vote? Visit: http://tinyurl.com/savvyvote.
Finding angel investors. . .
September 2, 2008
Lots of people ask me, “How do I find angel investors?” I don’t have a great answer, but perhaps I can help some of you think about who angels are and as a result perhaps you will be able to find them more easily. To start, I think it is important to classify angels in a few classes:
- Type 1: Novice angels with financial objectives
- Type 2: Experienced angels with financial objectives
- Type 3: Novice angels with subject matter expertise
- Type 4: Experienced angels with subject matter expertise
- Type 5: Family, friends and colleagues
You will find lots of Type 1 and 2 angels at angel investment groups. The main problem with this group is that they have usually have a very limited understanding of your space and as a result require more information about your startup than you will be able to provide. They want to be convinced that the IRR is going to be sufficient, but you aren’t even sure what the product or service will end up looking like. Type 1 investors have NEVER made an angel investment and it is unlikely that they will invest in your deal unless they know a Type 2 investor who has already agreed to invest. As a result, you might as well avoid Type 1 guys completely. Type 2 guys are fine, but only if they have clear and provable access to professional investors. Their relationship with professional investors (i.e. VCs) needs to be vetted prior to spending a tremendous amount of time with them (i.e. ask them for references to CEOs they funded and ultimately introduced to real VCs). Talk to CEOs they funded and get an understanding of what it was like working with them. Make sure there is value beyond the money.
Type 3 and 4 angels are the best, but they are hard to find (they almost NEVER join angel investment groups). They are people who have previously made lots of money in and around your space. They have subject matter expertise around your idea and can often provide a lot more than money. In many cases they will know the ultimate customer that will ensure your success and insure their investment. Novice angels in this space are almost as good as experienced angels, both groups will be able to understand your idea very quickly and will be able to evaluate your idea without lots of bogus financial models. Start by talking to your lawyer, your friends, your colleagues, your competitors - anyone who might know people who had prior success in and around your space. Check out LinkedIn and Facebook, use their advanced search functions. Type 3 and 4 angels will be able to act on their own, investing without the ‘buy-in’ a Type 1 or 2 angel might need.
Type 5 angels are good and bad. They are your family, friends and colleagues. They will invest in YOU, not necessarily your idea. This is a good thing until and unless your idea fails and YOU fail them. They won’t understand that angel investing is risky and they they are likely to lose 100% of the their money 90% of the time. No matter whether or not you explain this prior to their investment, they won’t understand - EVER. You may lose relationships with family members, friends and colleagues.
My advice? Focus on Type 3 and 4 angels. Otherwise use your savings, borrow against your 401K, borrow against your home equity, get an SBA loan until your idea is ready for real investment dollars.
Where did the VCs Go?
August 29, 2008
That is what an article in the Dallas Business Journal asked earlier this month. Jeff Bounds reported that, “Venture capitalists were AWOL during the second quarter of 2008″ explaining that only $17.3MM was invested by Venture Capital firms in North Texas companies during the second quarter of 2008! Really? Only $17.3MM? Jeff continues by suggesting there were NO first round venture investments in the second quarter.
To be honest, I don’t really believe the numbers. I suspect there was more than $17.3MM invested in local startups because several startups who I KNOW raised venture capital weren’t included on the list. Additionally, several active venture capital folks (i.e. relative to market) weren’t even included in the survey. So what is the real number? Did anyone raise first round capital for their startup in the 2nd quarter? If you know the answers, please post!
Huge Big in Japan Announcement!
August 28, 2008
Part one of the Big in Japan annoucement I promised you HERE. Part two to follow this evening as soon as I am given the green light (no hints).
Great time to start a venture fund?
August 12, 2008
Yesterday a couple of friends stopped by to tell us about their plans to launch a $100MM fund. Ironically, this might be the perfect time to do so (at least for people with a track record of excellent returns). During our conversation we began talking about venture fund economics and I recalled a couple of posts Fred Wilson wrote that give a great insight into the process (I have mentioned them before). In any event I am reposting the links here (for my friends benefit and hopefully yours).
Post #1: Venture Fund Economics
Fred’s point about returns are quite interesting. He explains how a fund could return annual returns of over 40% and only return 2x on committed capital (2x means investing one dollar and getting two back). How is that possible? Read the post. Fred also included the original model for Union Square Ventures original fund:
Basically, they estimated a 4x mulitple on invested dollars (i.e. invest one dollar and the fund would generate four). Fred is pointing out that an investor would only see 2.56x on their money despite the percieved 4x return the fund ‘grossed’ (i.e. one dollar would return $2.56 to the investor). For those of you interested in IRR the fund would generate almost 40% GROSS IRR, but return around 28% NET IRR. Fred also cited an article by Paul Margolis with a similar explaination in a post titled, “VCs are happy again, but are they making any money?“
SEC kills the press release!
July 31, 2008
Jennifer Leggio from ZDNet reports that the “SEC unanimously approves use of corporate blogs to meet Reg FD requirements.“ For the longest time companies have had to issue their news via newswires to meet the Reg FD reporting requirements. Now that companies can issue their own news via their own blog/rss feed I suspect the days of the newswire-distributed press release are numbered. We haven’t released anything via a newswire in years. Brian Solis won…
Dallas Startup Happy Hour (Monday July 21 @ 5PM)
July 19, 2008
Are you interested in connecting with the local startup community? We are working to build a vibrant startup community here in Dallas every bit as interesting and dynamic as San Francisco, Boulder, Boston or Austin. The first step is engagement.
The first Dallas ’startup happy hour’ went so well we decided to make it a regular thing (every other Monday). We hope to see you at the INFOMART High Tech Bar at 5PM this Monday July 21st. If you need directions or help finding us feel free to call me at 214.550.2003 or if I am not available try our help desk at 214.550.2002 (during business hours only).
PLEASE RSVP on Upcoming.org here: Dallas Happy Hour (we need to make sure we can handle the turnout)
The last ‘Startup Happy Hour’ (still thinking about an official name) went off without a hitch. Around 5PM, Brad Merritt (CEO of WhiteBox and my partner), George Carter (inventor of Laser Tag) and I were the only attendees (except of course for Jennifer and Masha who agreed to help sign people in and hand out name tags). But within 30 minutes we had around 20 people. By seven we had upwards of 50 people (34 of which filled out Jennifer’s sign in sheet). I closed the tab around eight and there were still about seven or eight people. I was really surprised we had such a good turnout. The best part of the evening was the mix of people. The majority of people worked at startups. There were a few angel investors, perhaps not as many as we would like (it is July after all).
Startup Attendees included:
Charles Humphreyson Prova www.provagroup.com
Brian Wiblin Concepla Systems www.comceptasys.com
Jason Hudgins Droidworks http://blog.droidworks.com
Brian Lee Profit Stars www.profitstars.com
Ty East Symon www.symon.com
Carri Craver Nomee www.nomee.com
Justin Bigelow Adshuffle www.adshuffle.com
Marc Archin Web Algorithm, Inc. www.webalgorithm.com
William Watts Intelivox www.intelivox.net
Paul Sanderson Near Port www.webalgorithm.com
Jay Ramirez Marblehead http://blog.marbleheadllc.com
Marshall Lawrence Architel www.architel.com
Abdullah Jibaly Ayoka www.ayokasystems.com
Scott Whigham Learn It First www.Learnitfirst.com
Mark Blaskovich Ayoka www.ayokasystems.com
Paul Johnson Lomans Rx www.lomansrx.com
Kevin Theppharaj Architel www.architel.com
Stormy Shippy High Form www.highform.com
Micah Davis Roov.com www.roov.com
Andres Fabris Traxo www.traxo.com
Eknauth Persaud Ayoka www.ayokasystems.com
Andy Chen Traxo www.traxo.com
Brian Mann Rank One Sport www.rankonesport.com
Scott Ticer n/a www.scott&tieless.com
Charles Cecil MCG Group www.mcggroup.com
Scott Ryan Architel www.architel.com
Brad Merritt WhiteBox www.whiteboxco.com
Of course there were more, but they didn’t give us their name, URL and email…
Raising venture capital while preserving your integrity
July 15, 2008
When do your fiduciary duties to your shareholders collide with your own integrity? Many of us who have been CEOs of venture-backed companies have realized at one point or another that the current round under the current terms is a ‘bad deal’ for the new investor. Even worse some of us realize that EVEN if we raise the current round things look grim for our business. So when does your integrity outweigh your duty to your current shareholders? Your lawyer (and I am not a lawyer) will tell you that you MUST serve your current shareholder despite your own opinion about the deal. But what would your pastor say?
Last week I was having a conversation with an entrepreneur/friend who recently filed Chapter 7. He had raised millions of dollars from local angel investors, but failed to close a professional round that would have kept the company alive. He was very close to closing a professional round, but even he realized it would have been a bad investment. Nevertheless he kept moving forward with the investors who ultimately pulled the plug. This happened to me back in the summer of 2001. We needed $100MM to break even, but instead we got a term sheet for $40MM. I knew we couldn’t make it with $40MM and I wasn’t sure $100MM would get us there. But the mantra, ’save the company’ kept beating in my ears. Of course I convinced myself that if we could raise the $40MM would could live to fight another day. Up until very recently I would have advised founders to ’save the company, save the company, save the company, save the company…’ Today I am not so sure ’saving the company’ is worth your integrity.
That was almost seven years ago and I would do things very differently today. On the expense side I would cut expenses (headcount) much faster than I did. I wouldn’t blindly follow the whims of investors against my own better judgement. And I wouldn’t propose a deal I wouldn’t be willing to invest in myself. I used to be COMPLETELY against personal guarantees and in general I think they are a bad idea, but as a personal test before you take someone elses money, ask yourself if you would be willing to sign a personal guarantee to take the funding (rarely are you in complete control so I highly advise against signing one). My advise to anyone in a similar position, if you can’t figure out a way to serve the interests of the existing shareholders as well as future shareholders you should resign. Explain to your existing shareholders that you can’t, in good conscience, raise good money after bad. Of course you should talk to your lawyer before doing anything so rash or crazy (I would and did).
Yahoo/Microsoft/Icahn News
July 14, 2008
You have to read Carl’s letter to shareholders found here.
VC pain is an Angel’s gain!
July 9, 2008
According to Larry Dignan of ZDNet VCs are a glum bunch over the economy and the lack of exits. Larry explains that many VCs are “becoming tightwads and holding on to their cash.” Of course, this is a little troubling for startups, but it might spell opportunity for savvy angel investors. Startups with scaled back plans (i.e. lets not raise $5MM, but lets see what we can build with $1MM instead) may be able to find angels who were previously priced out of the startup game to fund their ideas. I like scarcity, I think it makes the gems easier to find. All to often when there is easy money it becomes increasingly difficult to find good deals, or when you do they are simply too expensive (i.e. they skip seed stage). Of course, I think this positions our Angel/Entrepreneur meet-ups in a strong position in 2009. I have had several very positive conversations about the idea and I think we are making some fast progress. Hopefully I will have more to report when I return from Vegas next week.
Ever wonder what a letter of intent for VC funding looks like?
July 6, 2008
Rick Segal posted an example letter of intent (as opposed to a term sheet) that I thought was worth reading:
Dear Dave,
Thanks for taking time out of your schedule to meet with my partners and I regarding NewCo. I know a second meeting is a pain but it went very well. We think you did a good job explaining it and based on the first pass due diligence on the space, opportunity and you folks, we would be prepared to dig in more and see if there is a deal to be had between your company and our firm.
As we discussed, I wanted to outline our intent inline with setting expectations on process, major terms and your questions regarding share structure/value.
First, given the stage of your company, many of the items on the DD checklist I sent you are not applicable. We will waive the environmental hazard waiver, as a rather humorous example. My expectation is the there are a couple of weeks of calls, material review, and analysis to do. We have two other files being worked on, one requiring travel to the west, so there will be some interruptions to the process. In the past, many hold ups are getting the material from the company lawyers and attorney’s so I strongly suggest you send the checklist to them immediately and get them rolling. On items that are N/A, they just are so no worries. We will need to schedule a site visit and would like to arrange interviews with the named parties that we talked about in my office. My best guess is 10 - 12 business days to get this done at which time, assuming we are all good, we’ll lock down the term sheet. The materials can be electronic. We have a Sharepoint location you can use as an electronic data room or you can send us a CD/DVD, doesn’t matter to us.
On general terms:
Assuming we do this deal, we are proposing to issue a Class A preferred share with a 1x liquidation preference, with an 8% coupon. This is a non-participating preferred share and the 8% is not paid, it accrues until the liquidity event which is usually defined as a sale or IPO. We require board representation. It is mandated by the way our partnership is structured and is not negotiable. As I mentioned to you in our meeting, if this board seat thing is a problem, we should stop now since we can’t waive this. The size of the board is open to discussion, however my suggestion is 1 from us, a common share rep, you(as the CEO) and two independents which we agree on.
We will ask for drag along and tag along provisions which are fair to all of us. When we get to a formal term sheet, they will be outlined in greater detail. The sample package of VC documentation I’ve attached can show you want these and other things look like, but every deal will be slightly different. You are free to have your council review this package so you can get a clear expectation of what’s coming. Your lawyers can also go into great detail on each item and how to deal with each one.
We have certain items that fall under the category of “matters requiring special approval.” Essentially, this is a list of items that notwithstanding the approval of management and the board, you must have our written consent. Our board seat and vote from the seat does not necessarily give you approval. In the 8 years I’ve been doing this, I’ve never seen a case where we have said yes at the board and no at the firm level. Even so, I want to be clear on these issues. Depending on many things we learn over the next couple of weeks, this list will get adjusted but there are a standard set of items that generally go in regardless. They are:
You can’t change the corporate structure without JLA’s permission. For example, you can’t change the incorporation location without our permission. The board may want it and you might want it, but if it (for example) could cause a tax problem or some such for our LPs, we wouldn’t sign off.
You can’t modify our share rights without JLA’s permission. For example, you can’t have a vote and decide to remove our preference even you have the votes or other shareholders to support it. We have to approve.
You can’t incur outside debt (other than operating lines, etc) over a certain amount (to be discussed) without JLA’s permission.
You can’t remove us from the board while we own 10% or more of the company. While this is normally in the Shareholders agreement, I like to call it out so we all know the facets of this marriage.
You can’t modify the shareholders agreement which changes, in any way, our rights. This is like the second one but we add it for clarity. This usually is the most contentious so we can have a separate discussion about what we will/won’t do. Rigid flexibility, that’s my general motto.
No third party transactions (over a negotiated amount) without JLA’s permission. This is there to prevent you from hiring Uncle Ned with us actively approving it.
There are other items which you can read about in the enclosed sample pack but this gives you an idea of what to expect.Valuation:
You asked about where the value would come in. Generally and seriously broadly speaking, we believe an investment in this space, at your stage and with the additional capital required, best case, will come in at around a pre-money valuation of $6 million. Again, this is the best case, no brain farts/problems in the DD process. Typically, what will reduce the valuation are these items:
Budget adjustments. Essentially, we take your model, do VC Voodoo on it, and come back for a discussion. If we agree on the costs, revenue ramps, etc, and they are materially different than what we start with (your leave behind model), the valuation of the company can change. The key, of course, is getting agreement on numbers which make sense to both of us.
Market data. Sometimes it will take longer and take more capital to get something adopted. If we think there is more (materially more) risk than when we started this discussion, the value can change. Yes, we are venture capitalists and we are supposed to take risk, I agree. I make this point only to emphasize the materially more part.
Finally, the references. I’ve provided you a list of all our portfolio CEOs. As I mentioned to you in our meeting, please do call them all and meet with as many as you can. I believe this is the best way to find out what I (and our firm) can be like once the deal is done. Ignore all the he is a nice guy stuff and ask questions about what we did/how we acted when there were problems or issues. I think you will be pleased with what you find out.I hope this gives you the information you need in order to determine if we are the right fit for you. Let me know if you have any questions. I look forward to hearing from you with respect to proceeding.
Thanks again for coming by and letting JLA take a look at your opportunity.
My NDA Policy ~ I have decided to starting signing them!
July 3, 2008
You would be surprised how many call me looking for advice (i.e. free advice that I am happy to provide), but first ask me if I would sign an NDA before they share their idea with me. I have refused to sign NDAs for a number of reasons in the past (well covered in this blog). Of course I have mentioned before why keeping your idea secret creates a real incentive for someone to steal it, but assuming you MUST keep your idea secret and you still want my advice I am now willing to sign a mutual NDA. Basically I agree to:
- Review your NDA prior to our conversation (I need at least 12 hours to review prior to our meeting); term must not exceed 36 months.
- Execute, in duplicate, the NDA.
- Forward your NDA to our office manager who will a) copy your NDA and file in our contract system and b) send a copy to our lawyer who will also keep the NDA on file.
In exchange for entering into an NDA with you and/or your company I am charging what I call my NDA fee to offset the handling costs I will incur over the next 1-3 years of handling the contract you have requested I enter into. Currently the fee is $1,000 per NDA. Of course, I prefer that we skip the NDA entirely thus saving you the $1,000 and me the headache of dealing with ‘yet another contract’ with someone I have likely never met and won’t meet again.
Houston Startup Happy Hour
July 2, 2008
Ready to network with Houston’s growing network of entrepreneurs? Check out their latest startup happy hour.
When: Thursday, July 3rd 6-9PM
Where: The Tasting Room @ River Oaks
2409 W. Alabama 7213.526.2242
Click here for more info. The July Houston Startup Happy Hour features a live presentation of SnapStream’s latest release of their TV search software. SnapStream’s consumer product was showcased by Bill Gates in his keynote at the Windows XP Launch in 2001 and since then it’s received lots of industry awards and recognition, including PC Magazine Editor’s Choice. Snapstream’s newest product, SnapStream Enterprise, allows organizations to record and search within thousands of hours of TV recordings. It’s used by 1) presidential campaigns, 2) city/state/federal governments, 3) TV shows (like E!’s The Soup), 4) K-12 schools and universities, and many more. Come meet the founders and see a demo of their TV search software in action at Thursday’s Houston Startup Happy Hour!
Austin Ventures buying Entrepreneur!
July 1, 2008
According to PaidContent, “Austin Ventures and Another PE Firm Buying Entrepreneur Media“. The story came out in April, but I missed it completely. The company generated more than $60MM in revenue last year and the deal is reportedly under $200MM. Rafat explains,
The company was founded as a newsletter in 1973 and launched as Entrepreneur magazine in 1977. It also has a biggish online presence and operates book publishing unit Entrepreneur Press. Entrepreneur.com was launched in 1996, and has been popular and very profitable, a big part of the appeal to the buyers, our sources say.
Worst VC year since 1978!
June 28, 2008
According to the Matt Richtel, in the second quarter of this year not a single venture backed company has gone public. This hasn’t happened since 1978. Matt explains,
Some other venture capitalists say the industry is struggling to find its direction and has never fully recovered from the dot-com bust. That may come as little surprise to the well-heeled individuals and institutions that give their money to venture capitalists seeking big returns. Some of these investors have criticized venture capitalists for failing to provide substantial returns on a broad basis since 2000. Public offerings serve a critical role for venture capitalists by giving them a way to sell, at huge profits, stakes in the start-up companies they invest in and build. So the offering drought is being taken very seriously by the venture capital industry. The National Venture Capital Association, an industry group, said it planned to discuss the issue on Tuesday in a media blitz on television news outlets.
But Paul Kedrosky, an investor and the author of Infectious Greed, a venture capital-centric blog, said that there were deeper, more systemic problems for venture capitalists in addition to the cyclical challenges. He said part of the problem was that the industry was backing companies that lack widespread investor appeal, like YouTube clones and dating and social networking sites. “There is nothing that the industry is producing that investors want,” Mr. Kedrosky said. “The stuff they’re investing in is idiosyncratic — it’s fun and appealing to them but Wall Street doesn’t care.” “The Valley is operating in its own little world, and the capital markets don’t care about the things that are getting the Valley excited.”
This isn’t good news…
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