Sex & the Investor - revisited Wednesday, March 19, 2008

I'd forgotten about the presentation I did below at Barcamp London Feb 06 until I got a email today telling me someone had marked it as a favourite on Slideshare.com. So, when I checked the site I was thrilled to see that it had now been viewed over 8900 times [thanks Mom]. Reviewing it for the first time in a long while, I was still happy with the content and believe it's still relevant to entrepreneurs seeking funding.

Hope you agree.

SlideShare | View | Upload your own

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posted by John Wilson @ 8:38 PM Permanent Link ,

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The Accelerator Group says no thanks to newbies Tuesday, March 18, 2008

I was a little shocked to read the following comment from Robin Klein on The Accelerator Group's (TAG) blog today

"Funding business plans from first time entrepreneurs just won't happen anymore!"

As I commented in response, I'm assuming this just means TAG. Otherwise, if applied universally, then entrepreneurs will soon be an extinct species given that people cannot move between zero and two/three ventures. Of course, Robin may be including folks who've tagged along in management roles with founders in his eligible for funding category.

I can understand why TAG might use this filter, but entrepreneurs repeating previous success is also not a given. Whilst second time round entrepreneurs may have learnt lessons [from failure or success], you can also buy-in experience in support of a great proposition.

TAG have done incredibly well with their formula and have great relationships with the larger VCs, as well as having invested time in community initiatives. However this sends a dispiriting message to new entrepreneurs and undermines efforts of groups like Seedcamp, Y-Combinator etc who advocate that good ideas from quality people can get funding.

UPDATE : Robin responded
"sorry. Wasn't clear enough. My point was that just funding a 'business plan' ie a powerpoint plan with a 3year blue-sky financial model won't happen. Of course, first time entrepreneurs who bootstrap and build something, demonstrate consumer or trade engagement are always going to be of great interest."

That makes more sense.

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posted by John Wilson @ 3:51 PM Permanent Link ,

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Hallelujah - investment sense for startups Wednesday, May 16, 2007

When I read this post by Will Schroter, I almost wanted to print it out and hand it out to Open Coffee attendees.

Extract:

Here are 3 things investors are not looking to write a check for:

Ideas - Investors aren't going to write a check to you just because you have an idea. Millions of people have ideas and most of them are bad. What makes a good idea is not it's novelty, it's the ability to actually run with it and make it successful in the marketplace.

Founder's Salary - Investors won't pay for you to get a full-time market-rich salary while testing out a new idea. You're not going to keep your $200k salary by having an investor foot the bill. Think $50k, best case, and a regular withdrawal from your home equity line of credit.

Back Debt - So you've racked up $100,000 in personal debt while you were building the business. How about getting that money back when the big investment comes? Forget about it. Investors don't want to invest in your debt. Kiss that money g'bye and hope the money you raised turns into a jackpot to pay it back.

The general rule of thumb is that investors want to invest in the growth of a business, not the expense of an idea.

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posted by John Wilson @ 10:18 AM Permanent Link ,

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Who should you turn to for feedback on your ideas?

Seth Godlin writes an excellent blog and has a great post questioning which "type" of person you should ask for advice. He identifies four types of person:-

- One group likes everything. Tell someone an idea and she'll love it. This could be because she has such esteem for you, or it could be because it's easier than being critical.

- Another group hates everything. These folks have discovered that if you are harshly critical early on in a process, it means you won't be responsible for failure of the idea later.

- A third group eggs you on. These are the people who push you to make it sharper, more remarkable and, yes, riskier.

- The last group pushes you to tone it down. To go ahead, but carefully. To round off the edges.

It's so true

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posted by John Wilson @ 9:02 AM Permanent Link ,

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Should you issue debt instead of equity for seed financing

Venture Hacks has an article suggesting entrepreneurs should issue convertible debt instead of equity when doing seed financing.

Extracts
- Why is debt a great alternative to equity in a seed round? Convenience, suitability, control, cost, and speed.

- With convertible debt, the lender and your company both expect to convert the debt into equity when you close the Series A.

Interesting article and you should check out the discussion in the comments which included the following suggestion

If lenders are concerned about giving up a security (equity) interest in the assets of the company, consider securing it with founder’s shares instead (company has relatively few assets).

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posted by John Wilson @ 8:54 AM Permanent Link ,

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A guide to early stage board composition Tuesday, April 10, 2007

Will Price has the following guidance to offer on early stage board composition

For aspiring entrepreneurs, I would seek a board with the following characteristics
  1. small and nimble
    1. 3-5 total directors (CEO, 1-2 VCs, 0-1 independent)
    2. start-ups are fast paced and iterative; often board issues are event driven and pre-scheduled meetings often fail to coincide with the natural cycle of progress
    3. being held hostage to scheduling logistics drives CEOs nuts and delays the time to decision and action
  2. economically aligned
    1. if the economic incentives of the board are different, consensus regarding financings, M&A events will become more complicated
    2. if people make money at very different exit outcomes...
  3. empowered
    1. ensure the VC board member is well established at their firm and has "juice."
    2. the start-up road is long and bumpy, VCs with limited internal power are often more proxies than decision makers and their limited internal power may unfairly taint the credibility of the company
    3. their political weakness will limit their ability to support the company in times of peril
  4. value-added
    1. VCs must be able to accelerate the cycle time to success and understand the business
    2. The best VCs truly understand the human, financial, and market dynamics of their companies
  5. effective CEO-board and director-director communication
    1. CEOs must share information - both good and bad
    2. Directors need to work well together in executive session issues: compensation, audit, financing and other core issues
    3. Failure to act quickly on compensation/bonus programs and other executive session issues impacts morale and limits the effectiveness of company management
  6. informed directors
    1. Early stage companies need to begin to track, measure and report on relevant and timely data. Good board packages make for good board meetings.
    2. This is normally an iterative process but data and KPIs enable informed decision making and analysis
  7. productive processes and meetings
    1. Develop well structured meetings with adequate frequency and cadence
    2. Focus the meetings on critical path issues

As companies grow, the size, make-up, and roles of the Board change with it. This post reflects my observations of the critical success factors for healthy, functionining Series A boards.

For a more in depth analysis, please read "The Basic Responsibilities of VC-Backed Company Directors."

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posted by John Wilson @ 8:04 AM Permanent Link ,

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Ringside Startup - Let's hope there's an early KO Thursday, March 29, 2007

Is Ringside Startup anything other than a media/publicity stunt and can budding entrepreneurs really learn much from it?

The idea behind it is that the founder, who is understood to be a former Techcrunch journalist, is attempting to raise $20k to fund a new business, and will get advice from a series of investors/entrepreneurs on key issues, all of which will be transparently reported on a blog.

Issue 1: The business idea has yet to be chosen, albeit there is a paragraph outline on a handful of ideas, yet the key objective so far is to raise the money. Hmmm. Cart and horse inversion problem in my view. I concede that this is exactly how VC funds work, namely raise a fund and then identify companies to invest in, but that's not what this project is reportedly about.

Issue 2: Do I receive equity for a financial contribution? Errr, no but you do get free publicity on the blog and your wise words can be seen by all, as your advice is posted in the comments section of the blog (if I have correctly understood the process).

Issue 3: The motivation of the founder seems to be around the media opportunity than actually creating and running a business, which generates actual value. At least the MillionDollarHomePage project was naked in its' desire to raise a ton of cash for nothing.

After 3 days or so, the venture has only raised a few hundred dollars, much to the evident dismay of the founder, who is already lowering his(?) aspirations to $10k and looking for a Plan B. Yet, anyone involving in raising funding would appreciate it is often a slow process - giving up after a few days is not really in tune with the audience experience that the site is reportedly going to educate. Heck, if the site had raised $20k in a few days that would have been very worrying especially with no business to speak of. It might have re-enforced the bubble view.

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posted by John Wilson @ 9:11 AM Permanent Link ,

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The realistic entrepreneur's guide to venture capital Monday, March 19, 2007

Seth Godin makes some interesting observations about seeking and taking funding.

Here are a bunch of conditions that you ought to take seriously before you invest the time and the energy to track down outside money for your great idea:

1. Investors like to invest in categories they've already invested in. If your business is so new that it's never been tested before, or is in a category VCs hate, think twice.
2. Investors want you to sell out. As soon as possible. For as much as possible. They have no desire to own part of your company forever.
3. Investors want to invest in a project that's tested. If you can't make it work in the 'small', why do you think it'll work when it's big?
4. Being a little better than the market leader is worthless.
5. Investors don't want you to use their money to cover your losses. They want you to build an asset (a patent, an audience, channel relationships) that's actually worth something.
6.Investors want someone to run your company who has successfully run a company before.
7.Investors want to be able to come to one of your board meetings and still make it home in time for dinner.
8.VCs like curves more than they like cliffs.
9.There are actually very very few business problems that can be solved with money.
10. You will probably have to replace many of your employees if you raise money from someone.
11.VCs understand that being the best in the world (#1) is the place with the biggest rewards, so it's unlikely they will settle for any performance (even a profitable one) that puts you in second or third place.
12.VCs are very smart and very connected, but they're smart enough to know that their connections and their insights can't fix a broken business.
13. Investors are very focused on the company, not you. They're not interested in having you take out your original investment or paying you a large salary as profits go up.
14.Business plans are bogus. The act of writing one is critical, but no one is going to read more than three pages of what you write before they make a decision.
15.The companies that VCs most want to invest in are the companies that don't need their investment to survive.

I don't agree with 10. 14 is mostly true. 6 is a preference just because it should reduce the number of mistakes likely to be made due to inexperience. As for 7, that would be lovely.

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posted by John Wilson @ 10:20 PM Permanent Link ,

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"I'll use it if you will" Saturday, January 27, 2007

Online and offline there are two types of business
Examples of "crowd dependent" are markets like ebay and the stock exchange; telephone networks like skype; social networks like bebo; "knowledge aggregators" like crowdstorm. In each case, their value increases as more people join.

Conversely, services such as calendars (airset, google), spreadsheets (google) and docs (zoho, think free) or something as simple as a ticket agency/online store can be useful to an individual or a small group regardless of the total customer base.

This is a significant distinction because the likelihood of success for a venture varies enormously between the two.

Crowd dependent businesses are hugely dependent on early adopters joining in "anticipation" of it eventually becoming useful. Hopefully, a virtuous circle is created in which sufficient people join that it reaches a tipping point. Depending upon the crowd size required, this may demand enormous marketing spend to drive customers in quickly. Of course, once you achieve the tipping point, this provides you with enormous competitive advantage over other new entrants - essentially it creates a barrier to entry. Customers are also locked in to your business to some degree since they derive benefits from being part of the crowd.

A self-standing service can afford to grow more slow (funding permitting) and can immediately deliver value to its customers. However, it's far easier for customers to switch to a new service. Whilst they may have invested time in using your business

Hence in evaluating a business opportunity as an investor you intuitively think along the lines of

Investment required

Success probability

Potential value

Crowd dependent

High

Low

Very High

Self standing

Low

Medium

Low-Medium

This isn't gospel and obviously the nature of the opportunity will affect this rough guide.

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posted by John Wilson @ 9:14 AM Permanent Link ,

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Startup entrepreneurs rejoice! Tuesday, January 16, 2007

I've just been speaking to David Cohen, Colorado investor/entrpreneur, who I first came across with his Earfeeder venture. Yesterday, he and three friends launched Techstars.

This is simply brilliant and I am already speaking to a number of people in the UK scene about how we can do the same as a UK "chapter" of the idea.

Simply put Techstars is inviting startups to apply for a small amount of seed funding ($5k per founder to a max of $15k). Ten firms will be selected from the applicants. However, the bigger prize for the lucky firms will be access to the Mentors that have offered their time to help the startups - there are some notable names amongst the list of mentors offering their time over the Summer.

In exchange, Techstars takes 5% of the equity of your company, with no dilution protection required.

Clearly TechStars companies will get immeasurable benefits that come from introductions and connections to potential partners and customers. At the end of the summer, each company also has the opportunity to pitch during an investor event that they organize.

Worth checking out. As they say get funded; get educated; get started

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posted by John Wilson @ 10:45 PM Permanent Link ,

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