Posted by paloalto on 2009-01-19
Tags: Operations Partners
I just read the advice posting regarding vendors, which I agree with for the most part.
I offer the same warning for large partners. We spent several months developing specific features for our application in order to launch a major initiative (major for us) with a large national "partner". A year after the target launch date, the partner still has not delivered. We were to be a key part of their new website release, but they have not released their new website. Two of their website vendors have come and gone out of frustration. They are just dysfunctional internally, more than other large corporations I have worked with. They are also a quasi monopoly, making their employees experts at avoiding any changes, because changes = more work for them, while revenue continues to stream in, at least for now.
Most of our development can be used anyway, but there are specific pieces we spent money and time on that apply only to this partner. Ouch.
Now we are looking at other partners (one is a direct competitor), but we will make sure the partner has enough at stake to instill a sense of urgency in getting it launched.PRIVATE: Members Only
Posted by Anonymous on 2009-01-18
Tags: Operations Vendors Development
For those who have recently been funded (for the first time) or bootstrapping with own funds, I write to you personally as fair warning. Be careful putting all your eggs in the performance of one vendor as key to your launch strategies.
We did just this.
Our team worked with a technology vendor to develop our application from Sept 07-Jan 08, which was when this company was to launch our product. It never got completed.
We hired a third party project manager to attempt at salvaging the project and he worked with them until April 08 ~ still nothing. All the while the revenue we were taking in (from our previous beta application) dried up.
The reason I am sharing this is because I just read a post about lawsuits and how long they take / expensive they are. So true. We canceled our contract in April after they still did not perform or deliver. Per our contract they still had 30 days to deliver. Instead they placed a lawsuit on us.
The short of it is over the past 9 months we've dived into financial heartache. No product delivered, nothing $$ returned to us, legal bills and no revenue.
Our contract is pretty iron clad - even encompassing a penalty fee for every day they are overdue with the project. But, how can you fight with the best legal team (ours) against a vendor that has an essentially free team with lots of time on their hands?
My suggestions: if I had this to 'do over' I would say --
My due diligence would have been much more in-depth to include our attorney pulling a complete past history at the county, state and national level of this firm. I would have requested more direct client referrals to check out. Also, I will never give money to a firm again until a product is delivered - no matter how large the scale. We actually gave them a security deposit which we've not seen since.
Lastly, I would have actually hired my own internal team vs a firm - even if it were temporary, to complete this project. Our own team would have been underfoot and where I could reach out, touch base and keep dibs on their time management.PRIVATE: Members Only
Posted by fnazeeri on 2009-01-04
Tags: Venture Business Crisis
I just got off the phone with a friend who is founder/CEO of an early stage medical device company. His company is doing well and recently received a couple of term sheets for his first institutional round. As he was going through the process of negotiating with the potential investors, he said they were trying to set his expectations low. He told me a story about how one investor recounted tales of startups making mass layoffs, cutting back everywhere and generally dire conditions (basically sending the message that he should be happy to be getting an offer).
So my friend responded, "Wow, that sounds terrible. This must be really affecting you badly...how many people have you had to layoff here""
The VC stared at him with a bewildered look.
Read more here.PRIVATE: Members Only (2185 Characters)
Posted by fnazeeri on 2008-12-10
More here.PRIVATE: Members Only (1627 Characters)
Posted by forrational on 2008-12-08
Bootstrapping is looking better and better.PRIVATE: Members Only (5345 Characters)
Posted by fnazeeri on 2008-12-05
Tags: Operations Bankruptcy Crisis
I just finished writing this post about how startup failures are up. Not surprisingly Q4 2008 (already) is the biggest month for startup failures in the past 10 quarters.PRIVATE: Members Only (603 Characters)
Posted by Anonymous on 2008-12-04
Tags: Operations Crisis Burn Rate
I'm fundraising right now and it is absolutely brutal. I want to to tell all entrepreneurs, "Fight through this. You can raise capital." But that isn't true. You may not be able to raise capital until 2010 no matter how good your product or company is. It is not a reflection of you, just the external factors that are largely out of your control.
Survive until 2010 and position your company to take off as the next economic cycle does. These things always come back. While it is bad now, it will eventually get better. The Wall Street guys will get tired of losing money and companies will start hiring again.
I hope I am wrong. (Boy, do I hope I'm wrong.) Maybe Obama will follow through on his plan to eliminate capital gains tax on investments to startups. That would help us immensely. But I have heard nothing about that since it was mentioned during the campaign.PRIVATE: Members Only
Posted by Mr. Smith on 2008-12-02
Investors in venture funds, called limited partners, are pulling out or selling their commitments to provide essential capital to the venture model, causing the "Limited Partner Shuffle." Some experts are quoted as saying as much as 10% of all private equity positions will change hands this year in hasty transactions to generate liquidity, including premium positions by top-tier institutions like Harvard. See below:
What does this mean and why is it relevant to entrepreneurs" A quick overview of venture capital will help to answer these questions.
Venture firms raise money to invest from limited partners (LPs), who are normally endowments, pension funds, insurance companies, and other institutions that manage large amounts of capital. An investment in venture capital is considered a high risk asset class with the potential for high returns. The professional consulting firms that publish guidelines for how limited partners should allocate money across asset classes generally recommend that a small portion go into venture capital, sometimes less than 1%. This small percentage still amounts to many billions of dollars per year being entrusted to venture firms by limited partners, who control trillions of dollars.
Generally speaking, a commitment to invest in a venture fund does not require the limited partner to transfer money until the venture firm makes an investment in a portfolio company. So, a $100 MM venture fund does not have $100 MM sitting in the bank. Instead, as venture firms make successive investments, they collect money from their limited partners and distribute that money to portfolio companies in rounds. To cover operating expenses, the venture firms separately collect approximately 2% of the invested capital as a management fee.
In order to ensure that each limited partner honors their obligation to provide money when needed, which is referred to as a capital call, venture funds implement onerous terms for forfeit or default. The most common default protection is to wipe out any returns from all previous invested capital. This encourages an active secondary market for limited partner positions, since it makes more sense to sell a commitment than to lose the value of the money invested to date.
Fast forward to Q4 2008, and you have the perfect storm of venture capital destruction. First, a relatively large number of limited partners, such as AIG and Lehman Brothers, are facing solvency issues, and they can no longer honor any capital calls to venture capital funds. The large scale dissolution of limited partners is something new.
Second, as the equity and debt markets have collapsed, the allocation of limited partners to venture capital has increased as a percentage. If an LP has $1 billion under management and 1%, or $10 MM, committed to venture capital and if that $1 billion suddenly becomes $500 MM, the allocation schedule of 1% stipulates that the LP now only invest $5 MM into venture capital. Many LPs have charters that strictly govern these percentages, forcing the LP to sell commitments in the secondary market to comply.
Third, many potential buyers in the secondary market have liquidity issues of their own. The purchase of a commitment requires resources to buy the asset, resources to pay for future capital calls, and resources to cover management fees at a time where the future is uncertain. The lack of liquidity and uncertainty has caused a collapse in the secondary market values, with many commitments selling for $.50 on the invested dollar or less. This in turn has encouraged limited partners that might otherwise commit to new positions in venture funds to consider purchasing discounted positions in existing funds.
Lastly, venture capital returns have been hard hit by the downturn, reducing or eliminating the ability of certain funds to get back any of the original invested capital. Portfolio company acquisitions are on hold, and the IPO market is frozen. For many limited partners, investing more money into certain venture firms is literally throwing good money after bad when cash is king.
Most venture firms worldwide are facing problems as a result of this "Limited Partner Shuffle." The best firms are distracted by helping limited partners transfer commitments. Other firms will cease making investments for some period of time, possibly forever. Still other firms will not be able to collect their management fees and go under in the next fews months. Nearly everyone will be fundraising and spending a lot less time with their portfolio companies.
Many entrepreneurs are now pitching firms without a future, wasting invaluable time. These "Walking Dead Funds" are going through the motions until the other shoe drops, forcing them out of business. Other entrepreneurs are counting on investments or participation from funds that have no ability to deliver any capital. Lastly, there are entrepreneurs with soon-to-be-insolvent firms that hold controlling preferred equity positions and Board seats, leaving a potentially deadly vacancy in governance and voting control. How do you sell when your primary shareholder is no longer around to grant approval"
As an entrepreneur in today's market, you need to understand the relative health of the investors that you deal with. Start by asking them directly about their financial resources and the state of their limited partners. Don't hesitate to ask other entrepreneurs and other funds as well. You future may depend on having good information about the solvency of investors that you deal with.
[Please reprint any or all of this post. Entrepreneurs need to know.]PRIVATE: Members Only
Posted by sparrow on 2008-11-20
It's an easy trap to fall into. You've labored on your powerpoint presentation, you got nice graphics into it, you followed Guy's advice http://blog.guykawasaki.com/2005/12/t..., you practiced your pitch, and now you're ready to rock and roll.
You're a little nervous but feeling good. You go in and start your presentation, and you're on slide two, and the VC asks "What's the business model here""
No problem, you're ready for him. "I'll get to it on slide 7, let's go through the product first."
Stop! I know it' s hard to change the flow, but expect to do it. Go ahead and jump to slide 7 and give him 10 seconds to read the slide and then explain the model. 10 seconds should be enough since you don't have that much text on a slide, or you shouldn't and even if you did, it wouldn't matter since most VCs have ADD and won't take more than 10 seconds to read anything. The one exception is anything related to finance. But to get back to my main point (VCs are not the only ones with ADD), focus on what the other side is interested in and answer the questions in the order that they are presented.
Usually, one question will lead to the next and you'll find that you're referring to the presentation as support material rather than guiding the discussion.
So why do you need the powerpoint deck" As I just mentioned, it's support material, but it also helps you make sure you've covered everything. When things slow down in the conversation or when your time is almost up, go back through the presentation, and double check that you haven't missed any critical information.
As part of the conversation you'll hear some criticism or doubt about your product, your direction or something else in the presentation. Your gut reaction is to argue, mine is. They're not getting it. Stop yourself. Instead ask question to help you clarify why their thinking is different than yours. There are several reasons to do this.
1. They don't know your company and probably the space it's in nearly as well as you do. On the other hand, they've been exposed to a lot more companies than you have. You're getting free advice. Listen to it and try to absorb. I've talked to three VCs in the last 4 weeks, and two of them gave me good insight which helps me fine tune my model.
2. If they have this objection other VCs might have it too. Listen, learnd and maybe next time you do a pitch you'll be better prepared to answer this issue, or tackle it in your presentation.
3. Arguing has the potential of making you look defensive and uncooperative. Will they really want to invest in someone with these traits.
Having said that, if they challenge one of the basic assumptions of your plan and you've considered and rejected their arguments, it's perfectly OK to present this. "Yes, we've heard from other people that they thought that the markets can't be any bigger than 250,00 users, but actually a Gartner report in Feb of 2008 shows that there are at least 5,000,000. The reason the market is understimated is that most of these people are in Asia and the web analytics don't count them."
Here you scored a point. You thought of the problem researched it, and can provide supporting data.
In summary, try to reach a good balance of give and take. Talk about your product, show that you're excited about it, but listen. I certainly try to.PRIVATE: Members Only (99 Characters)
Posted by Spouse of msjane on 2008-11-08
Adeo was the morning's speaker at METal's Sat. breakfast meetings in Marina Del Rey.
He painted a sobering yet opportunity-laden year ahead for anyone who is thinking about seeking VC for their enterprise.PRIVATE: Members Only (2528 Characters)
Posted by fnazeeri on 2008-11-08
Earlier this week I spent several hours in a couple of meetings with Adeo Ressi, the Founding Member. Adeo is a very cool, very smart guy and it was both enlightening and fun meeting with him.
More here.PRIVATE: Members Only (3855 Characters)
Posted by Nand on 2008-11-04
Tags: Negotiation Terms
There is some similarity between this and the elections, so it's a good time to discuss this.
What does "Voting as a single class" means for you (and other small investors) " and don't get it wrong, you may be a big shareholder today, but you must think like the small shareholder you will be down the road.
Here is an example of how a VC with 20% of the shares can force a decision on all the other shareholders and investors, most of which are against that decision.
The lead VC has 20% of the shares (5% B shares+ 15% C Shares)
The lead VC wants to force a decision, the rest of the shareholders are 80:20 against it.
There are 30% series C shares and 20% series B shares. the rest are common and options (who don't vote).
The holders of the C shares vote first, the decision, forced by the lead VC wins (although 40% of the C shares are against). but all of them are now "voting together as a single class", e.g. casting all their votes in favor of the decision.
The holders of the B shares do the same, they are against the decision (80:20) they "vote together as a single class" against the lead VC.
Then there is a second vote. The "holders of the preferred shares", although most of the holders of the preferred shares are against, and although all the B shares votes are against the decision. All "the holders of the preferred shares" are now forced to vote for the decision.
Now all the preferred shares vote together for the decision, although most of the holders of shares and most of the investors were against it.
The VC, with it's 20% of shares, against the will of most of the other investors and most of the shareholders can force a decision.
Try and use the smaller VCs to remove this from the investment agreements.
They will tell you this is only inserted to simplify things, they will describe situations where some retired employee can influence the decisions and so on. Remeber, this is just another mechanism to give power to the biggest shareholder (who, in the long run, is not you).
Posted by Mr. Smith on 2008-11-03
Traction is the buzzword of fundraising these days. It is required by many, and understood by few. Here is an attempt at defining traction for all parties in the fundraising cycle.
1. The Idea: How strong is the fundamental idea and underlying revenue model" Does it make complete sense, and is it backed up by published industry data"
2. The Team: Have you assembled a group of domain experts that can execute the idea and the model" How seasoned are the experts that you have assembled"
3. The Prototype: Do you have a prototype of your offering that is compelling to the target audience" How polished is the prototype"
4. The Launch: What is the reaction among trade journals and other media outlets regarding your product launch" Is it well covered and well regarded"
5. The Adoption: How many target customers have adopted your offering and is the growth rate substantial" Are you experiencing a high level of customer satisfaction or a concerning level of churn"
6: The Revenue: Have you started to derive revenue from your offering and is that revenue either ahead or behind or model assumptions" What variables have changed from your assumptions"
7. The Profitability: How profitable or near profitable is your model once in operation, and are there untapped revenue opportunities for future revenue growth"
8. The IPO: How long until you can take your company public, assuming two years of fast growth, audited financials, and profitability or near profitability"
Most venture capitalists, for better or for worse, tend to invest in phases 4 and 5. VCs like the potential upside without the too much details from phase 6, though many investments occur at the start of phase 6, before any details can be conclusively determined. Any other thoughts"PRIVATE: Members Only
Posted by Mr. Smith on 2008-10-27
Tags: Preparation Materials
Having done over 150 investor pitches across five companies, a concise and well-organized deck is critical to success. No deck will be "perfect," but here is what I learned.
First, the deck should evolve as you meet with investors and evaluate their reaction to each slide, so use version numbers with the file to avoid confusion when sending the deck around. Next, avoid revealing confidential information, such as pending business deals or secret release features. Finally, make sure that each slide is very concise, using one line of text per bullet and no more than six bullets per slide. If possible, use graphics or a chart instead of text.
The whole deck should take 20 to 30 minutes to get through without questions, assuming that half of the meeting will be questions. The ten slides that you need, in my experience, are:
- 1. Vision: What are you trying to do, and why are you doing it"
2. Market: What is the market you are addressing and the estimated value of this market over the next 5 to 10 years"
3. Team: Who are the key three to five executives (Vision, Operations, Tech, Sales, Marketing), and what are their specific qualifications in the target market"
4. Offering: What is your exact offering" If possible, present a three to five minute pre-recorded video demonstration.
5. Roadmap: Where are you in your offering release cycle and with respect to gaining traction"
6. Deals: What are your major partnerships, relationships, etc." This slide should include various logos.
7. Differentiation: How are you different from your three main competitors" This slide should have a simple table.
8. Stats: What are the basic statistics of your company (Round, Investors, Employees, Location)"
9. Financials: What is your high-level projected P&L for the next two years plus the current and previous year, if available"
10. Capital: How much capital are you raising and what will it be used for"
This type of simple presentation has always worked for me. Please add any other ideas or lessons that have worked for you.PRIVATE: Members Only
Posted by fnazeeri on 2008-10-27
Tags: Operations Crisis
It's pretty rare that during a crash and recession there are employees and managers with recent experience on how to handle the situation. Well, the "good news" with the Great Depression 2.0 is that a whole bunch of us have relatively fresh experience. Last time the financial grenade went off in our lap. This time, we're collateral damage, which means it should be less painful assuming similar size crashes (which is looking less and less like a valid assumption).
In any event, here are some lessons I learned from the last time through this mess:
Posted by fnazeeri on 2008-10-24
Tags: Operations Compensation
Posted by RichieBlueEyes on 2008-10-14
This is basic advice, applicable to any sales situation and a mistake people often make. If you are meeting a potential client (or investor) first make sure they are interested in your product (your company) and agree to go out again (meet again) and provide more background on yourself (your materials) before trying to to sneak into the bedroom and score (discuss terms). Often times terms come up early, I'd recommend saying "first lets see if we click before talking specifics" and drag it out a bit... a meeting or two .... before talking numbers. This way, you know there is an actual interest, potentially leading to a term sheet before entering any type of negotiation which can cause the whole thing to go sour if there is a disagreement. However, if you already are all over each other, you're more likely to settle the disagreement then storm away unhappy. This holds true for selling anything. First gain interest, then sell. Many people just jump the gun and try to sell before knowing if they customer wants anything and while it can work, it changes the tide of leverage.PRIVATE: Members Only
Posted by fnazeeri on 2008-10-12
Tags: Operations Crisis
I just wrote this post on how venture investors decide which companies in their portfolio to let die, continue to fund or leave alone.PRIVATE: Members Only (888 Characters)
Posted by Anonymous on 2008-10-10
Tags: Preparation Late Stage
The declining economy and difficult IPO markets have made it increasingly hard for venture funds to price late stage equity. As a result, less and less late stage deals are getting done.
First, existing investors in late stage companies can not easily lead an internal round without a new investor pricing the round to satisfy the appearance of objectivity among their own investors, the limited partners.
Second, new investors have difficulty pricing later stage deals because evaluating the range exit opportunities is impossible right now. There have been no venture funded IPOs in the last quarter, and traditional public acquirers have seen a dramatic decrease in equity values and an inability to raise debt. Without public comparables or reference M&A deals, pricing equity is a guessing game.
On the other hand, early stage investments are largely based on pursuing market opportunities and owning certain percentages of preferred stock. A strong management team with a good market opportunity can raise capital without problem in today's market.
Your best shot as a late stage company is to conserve capital through cost savings and find a "friendly" to price your deal. Once a price is set, there is plenty of money for investment. The price is the hardest part to get. Any suggestions on some ways to land a "friendly""PRIVATE: Members Only
Posted by Mr. Smith on 2008-10-08
Tags: Venture Business Crisis
Posted by TDZach on 2008-10-17
Tags: Preparation Lawyers
Posted by J on 2008-09-14
Tags: Preparation Strategy Early Stage
Raising money for early stage companies has become more challenging. Traditional angels are more organized and difficult to reach. Most early stage venture funds have exited the field, and the remaining funds are (1) overwhelmed, (2) extremely focused, (3) incompetent, or (4) incubators.
Within this challenging environment, it is still possible to succeed if you know the "new" rules of the game. Here are some tips to consider with your early stage fundraising.
Structure: Almost all professional North American investments are made into Delaware C corporations. Lawyers greedily sell LLCs to charge you for conversion. If needed at inception of your fundraising, convert to a Delaware C corp structure with 2 to 5 million authorized shares to avoid closing friction.
Geography: Most angel and early stage investors focus on a strict investment region so that they can spend time with portfolio companies. Unless you are SERIOUSLY planning to move, don't bother to pitch a firm more than 100 miles away in the early stage. It's literally a waste of your time and theirs.
Traction: Every early stage investor will want to see traction before they invest, whether that is a prototype, a patent, or a committed team of experts. Gone are the days of funding a dream and a PowerPoint pitch. You alone are going to need to make the initial investment in your idea, committing both time and money to get your idea off the ground.
Relationship: Having a standing relationship with your early stage investors makes a big difference, so start attending regional entrepreneur networking events as soon as you have an idea. Don't wait until your idea is ready for prime time, as this is already too late.
Format: Avoid embarrassment by knowing about round types and raise amounts. A friends and family round is usually a purchase of common to get the company off of the ground, but can also be part of the angel round. Angel investors tend to participate in convertible debt or equity rounds that raise between $100K and $1.5 MM. Venture capitalists lead Series A rounds for $750K to $5 MM in preferred equity, sometimes more. The average Series A round varies widely by sector and geography.
Focus: More and more early stage investors are focusing, and they will rarely invest in competing businesses. This means that you should do your homework before pitching a fund. Just check their portfolio page to get a sense of what they are doing.
Pitfalls: Be very weary of convertible debt from venture funds, since, if that fund does not invest in future rounds, you will be completely unable to raise further capital. Avoid corporate venture firms, as these investors scare off other professional investors, since everyone will ask why the big parent corporation just doesn't buy you.PRIVATE: Members Only
Posted by J on 2008-09-13
Tags: Venture Business Angels AngelsSoft
I have been trying to pitch organized angel groups, more and more of whom are using Angelsoft. When I contact someone from the group, I normally get a response to put my deal into the Angelsoft system, which also apparently powers www.open-deals.com.
The problem is that nobody responds:
I have been an angel investor in the past, and it has always been more about coaching and personal relationships. It's not about scrutinizing a young financial model that arrives through email to evaluate hypothetical returns. It is about helping an entrepreneur to realize those hypothetical returns by sharing experiences and providing some capital.
With Angelsoft, all of the personal aspects of angel investing seem to be removed from the equation. My materials are submitted through Angelsoft forms, and then disappear into some system that encourages a group of busy angels evaluate the opportunity in a black box. Do they like it" Do they hate it" Do they even read it" I have no idea, since I have never heard anything!
My advice is for angel groups try to find a way to interact with the entrepreneurs that pitch, and entrepreneurs should try to get in front of angels if they really want to close a deal...PRIVATE: Members Only
Posted by J on 2008-09-13
Many entrepreneurs send a long introductory email and attach a ton of information when contacting an investor for the first time. There is the infamous multi-paragraph email and the 30+ slide PowerPoint that includes information on the vision, strategy, technology, and financials. Sometimes there is also the executive summary and even a full business plan.
The reality is "less is more." If you can say three words and get to the next meeting, then you have succeeded. Send just enough information on the business in the body of an email to get to the next encounter. Here are some reasons why:
Relationship: Investors want to get to know the people involved as much as they want to know the business details, so most investors want to have a few interactions before making any decision. It's very rare to close a financing in one meeting and even less likely after one email. Your goal should always be to get to the next encounter.
Mistakes: Providing too much information gives ample opportunity for a professional investor to find mistakes in your work. An active investor will see dozens, if not hundreds, of deals in one month, so it's likely that you have less perfect information than they do. Don't be judged too early on by perfectly reasonable mistakes caused by your lack of information.
Trash: Given the large volume of dealflow that professional investors are seeing, professional investors are likely to look at simple deals first, coming back to deals with a lot of clutter and materials later on. If you overload your initial email, it may be either (1) thrown immediately in the trash or (2) dumped on a junior associate "to process."
Confidentiality: Your initial materials, even your initial email itself, will likely end up with a competitor and certainly with another investor. Investor confidentiality is correlated (1) the length and (2) the strength of your relationship with that investor. Even in cases of an excellent relationship that has survived over time, confidential information still manages to leak.PRIVATE: Members Only
Posted by Anonymous on 2008-09-07
By diligently negotiating the cap on investor legal fees, you will dramatically accelerate both the diligence and the closing timeline. Most investors will easily agree to a cap of $25,000 to $50,000, and you can be sure that all of this money (and time) get chewed through on both sides. Factoring in your own legal costs, you could be looking at a $50,000 to $100,000 deal that takes between two and four months to close.
However, negotiate hard when you get a term sheet to cap the investor legal expenses at $10,000. With fees at this level, all of the work needs to go into drafting documents versus negotiating detailed terms. The lawyers themselves will feel pressure to close faster, rather than work endlessly to reach the agreed cap level. All in all, you will be looking at a cleaner deal that closes in two weeks to one month.PRIVATE: Members Only