Raising Capital and Launching Startups in Uncertain Times

This is part of my Series on Venture Capital.

A few weeks ago I authored a post describing five common myths about raising capital. In this webinar organized by the National Council for Entrepreneurial Tech Transfer, I am joined by colleagues of mine from the venture, angel and legal community to specifically address the challenges of raising capital and launching new companies in a difficult economic environment. The webinar's agenda also includes the following specific sub-topics:

• How recent market developments are affecting tech transfer offices and startups.
• Emerging trends in the angel investment market.
• Emerging trends in the venture investment market.
• Changes in legal terms of startup transactions.
• Positioning startups for funding and operational success.

In my remarks I specifically address how the economic downturn has affected university start-ups/spin-offs and what steps university venture labs can take in light of such conditions.  I welcome your insights as always.

Jeff Bezos: Extraordinary Entrepreneur

This is part of my Series on Entrepreneurial Culture.

If you’d like to hear an amazing entrepreneur talk about what he’s learned about over the past fifteen years, definitely listen to Jeff Bezos in this video below.  You’ll also hear why he’s so excited about his recent acquisition of Zappos. For those who don’t have time to watch it in its entirety his major points were:

• Be relentlessly focused on your customers

• Be ready to invent on behalf of your customers

• Be ready to think long term and ignore the noise

• Zappos is a remarkable company and is obsessed with its customers

• Remember, it’s always Day One!!

It’s easy to look at the behemoth that Amazon has become today and forget that all of this started with a tiny team working out of Jeff’s house. He is a true visionary.

Raising Capital: How Would You Pitch Your Business to an Old Friend?

This is part of my Series' on Angel Investing and Venture Capital.

I came across this short post from London-based VC Nic Brisbourne yesterday and it immediately struck a chord with me.  Essentially he recommends that entrepreneurs pitching to investors should communicate as if they were pitching to their best friend. In my opinion this is a simple yet very effective prescription and encapsulates in one fell swoop all the right things one should do in a pitch.

Remember, investors are first and foremost looking to back great entrepreneurs who know how to communicate well with colleagues, employees and customers.  When you convey your ideas in a straightforward and unaffected manner, are responsive to feedback, and as Nic says, “do as much listening as talking”, you’re really putting your best foot forward.  

Would love to hear your thoughts on this.

For the next post in this Series, click here.

Notable Posts: "Read All About It"

 

London VC, "Does Operational Experience Help a VC?"

In VC deals, Price Doesn't Matter - But The "Promote" Does

WSJ on Andreesen

Don’t Raise Money: China StartupBlog

University Spinoffs: Bridging the Cultural Divide

This is part of my Series on University Entrepreneurship.

 A big factor in having success spinning-out university startups is the ability to bridge the cultural gap between academia and the investment community.  I think about this divide a great deal, both as a long-time investor in this space and perhaps even moreso now that I am the director of a prominent university venture lab which spins out 10-12 new companies a year.

I was therefore delighted to recently come across this short post written by Amit Monga, Professor of Finance at the University of Alberta. He shares some excellent insights into the practice of investing in university startups courtesy of his prior experience as a venture capitalist.  Dr. Monga’s central premise is that investors want to see much more than technology when they speak with a university tech transfer office.  They are, after all, in the business of launching new companies, which require quite a bit more to succeed than the initial invention or discovery.

What really caught my eye, however, is his very first point which addresses the cultural divide to which I refer above. He points out that whereas it’s very much the custom in academia to focus on a professor’s achievements in research, (including his or her credentials, awards, honors, the number of grad students in their lab, etc.), the reality is that investors first want to hear a value proposition articulated for a potential business. Monga asserts that investors must actually have the answer to this question within the first five minutes of a pitch.

Having politely sat through quite a number of such lengthy introductions that never quite arrive at describing the “pain in the market”, I must wholeheartedly agree with Dr. Monga. In fact, I would say that this value proposition should be expressed within the first two minutes of a pitch.  If the investor is interested, there will be plenty of time to learn more about the professor’s academic achievements. 

I’ll go a step further on the subject of the cultural divide and say that I’ve seen instances where an investor’s motives are viewed extremely dimly by the academic. This too can be a problem.  Again, in this instance, it’s incumbent on the tech transfer folks to invite only the most reputable people into the university and to help work through any ingrained biases that might exist on either side.  For an eventual start-up to be successful, both parties will have to get along extremely well and will come to rely on each other. Start-ups are the very opposite of “arms-length” transactions.

So whether you’re an angel investor, a VC, an entrepreneur, a grad student, a post-doc or a university professor, it’s always valuable to approach university spin-offs with a great deal of cultural sensitivity and understanding.  I assure you, this sort of awareness alone can make all the difference.

For Part Ten in this Series, click here

My Interview on Venture Hype

This is part of my Series on Angel Investing. A few weeks ago I was interviewed by the great team at Venture Hype, a popular web-portal dealing with all aspects of angel investing. The interview was posted earlier today and can be found here. We begin by discussing my background and how I became immersed in the world of entrepreneurship and early-stage investing. We then go on to cover various aspects of academic entrepreneurship and university spin-offs, what works and what doesn't work, and what investing in this space is all about. Lastly, we touch on angel investing more generally. As always, I welcome your input and questions.

 For the next post in this Series, click here.

Launching Your Company: Send Lawyers, Guns and Money? Or Do It Yourself!

This is part of my Series on Entrepreneurial Culture.

The classic Warren Zevon refrain, “Send Lawyers, Guns and Money”, could very wellepitomize the attitude many first-time entrepreneurs take on when launching their companies.  In fact, I’m asked the question, “Which lawyer should I hire?” so often that I decided to share my quick thoughts on this matter.

In my opinion you actually do not need a lawyer. What you really need is a successful serial entrepreneur to be your mentor. She or he can help you not only with incorporation but with all the other issues you’ll be facing as you launch the new company.

In a nutshell- hold your fire and save your money.

Nowadays it’s a breeze to incorporate online and there are services such as Legal Zoom and others that remove any need whatsoever for engaging counsel.  Furthermore, standard Operating Agreements are widely available and figuring out whether to start an LLC, an S Corp or a C Corp or what state is best suited for your newco basically involves a two minute conversation with your mentor.  To pay a lawyer a handsome retainer and hourly fees to help you with any of these issues is a complete waste of money in my opinion.

If you don’t have an experienced mentor to help you and absolutely insist on hiring a lawyer, please remember that these services are a commodity. You should only work with reputable, respected lawyers that primarily work with start-up companies and who are well-regarded in your local entrepreneurial and investment community. If you go elsewhere you will most likely be shelling out thousands of dollars for the usual rigmarole. Reputable counsel will help you set things up inexpensively and will be a resource that is available to you as you grow your company.  Their value will manifest itself once you actually have a revenue-generating business and are perhaps raising your first round of institutional funding. 

I of course welcome you to share your thoughts and experiences on this topic.

Golfing-In-Exile 4: Staying Positive Around the Green

 

This is part of my Series on Golfing-in-Exile.

The drama on the fairway has subsided only to be followed by the gutteral mutterings of your playing partners as they flub multiple shots from green-side bunkers, patches of gorse, and sadly for one, a wet marshy area that sprays mud across his newly purchased and expensive outfit. He is further enraged now because his iPhone somehow got wet as well. Naturally, as you are all GIE's, no one thought to bring a towel- de rigeur for golfers who play regularly. Though it's a fact that cursing and invective is greatly muted on the green compared to let's say- the tee box, the heightened level of tension here can be devastating for many.

Here's where all your well laid plans for a successfully played hole can come to naught with the wrong mental approach. Be cool. Don't absorb all this negativity. Block out the many painful memories of flubbing these "easy" shots in similar situations. You’re actually just on the fringe and have a normal lie some 25 feet from the pin. Here’s what you need to do:

• Take out your PW and take a few practice chip-swings. You are going to let the club do the work and go through the ball, keeping your wrists firm and unbroken through follow-through and ahead of the ball. You are not going to try and guide this shot.

• Get the feel in your hands and a sense of the distance, etc., then address the ball. Make a crisp chip and whatever you do, do not de-celerate. Go through the ball. It will bounce a couple of times and roll gently somewhere near the pin.

• This guy explains it pretty well:  http://www.youtube.com/watch?v=lyzcyrBoab0

• Next, when it's your turn, take the putter straight back and straight through with the putter face following the ball to the hole.

• This is key: Pluck the ball out of the hole and keep moving. You’ve just tricked your body into thinking it can play golf so don’t pause to contemplate what just happened.

You made par. You’re becoming an accomplished GIE. You’re actually having fun for a change.

For Part 5 of this Series, click here.

Golfing-in-Exile 3: Keeping Your Cool on the Fairway

This is part of my Series on Golfing-in-Exile.

We'll pick up now from where we last let off. You will recall that in our previous installment you struck your tee shot amidst some seriously adverse circumstances and nevertheless managed to land it on the fairway. Of course you were using the vaunted GIE Rules for Hittting off the Tee. Sadly, the same cannot be said for your playing partners. So whereas you’ve kept your cool, the other guy in your golf cart has already started to come unwound. He’s still on the same phone call, starts to raise his voice a few decibels and you can tell it’s going to be a blow-out. A self-aware golfer-in-exile (GIE) like you expects all this however, and remains unruffled.

You walk up to your ball and you’ve got 150 to the pin. Ok, so in the old days when you were playing a lot you were a monster and would typically hit a pitching wedge here.  You begin to reach for said wedge but something stops you....

You suddenly remember that you are a GIE. You realize that you’re actually not 17 anymore, in fact you’re 40+. You also remember that you were using a crude, freak-show set of vintage irons back then, namely, First Flights: The Instrument. In those days a First Flight wedge weighed something like 10 pounds and could double as an 8 iron (or a tire iron for that matter).  Your hand moves slowly now towards the nice, modern 7 iron in your bag. You remove it as if in a trance, address the ball, cock the right knee, get some rhythm with a few waggles, and without any fanfare take it back nice and smooth and knock a weak fade just off the green onto the fringe. It wasn’t great, but you’re a chip and a putt away from par. Not bad, right?

Your playing partner has now become the Incredible Hulk and brutalizes his approach,  launching a low screamer over the green into no-man’s-land. He picks the phone back up off the fairway and continues to jaw with the CEO he is firing. You glance back and see the other two guys in your group riding all over the place like drunkards, still looking for their ball. Again, you’re a GIE now- so nothing fazes you.

See you shortly on the green....

For Part 4 of this Series, click here.

Mourning Angels: What Went Wrong With Your Investment? (Case Study #1)

This is part of my Series on Angel Investing.

Some readers of this blog who are interested in getting involved in angel investing recently suggested I do some case-studies as part of this series. I agreed and thought we ought to start by examining some typically negative scenarios that one inevitably confronts as an angel. Hopefully these case studies will stimulate some questions and further discussion from which we all can learn.

Eventually we'll work our way back to the core issue at hand: your own judgment of other people’s capacity. (See my earlier posts on this topic here and here).

(**Disclaimer: These case studies are not modeled after any person or any company in particular- they are designed for illustrative purposes only).

CASE STUDY ONE:

So you hear rave reviews about this guy long before you meet him. The people raving about him are actually some customers of his whom you’ve known for years and respect and who have successful businesses of their own that have benefited greatly from his product. You meet him. He needs some growth capital. He’s an industry veteran, a go-getter, knows the business inside and out, knows how to stretch a dollar and generally checks out at first glance. You and your small band of angels analyze the business and perform your supposed due diligence.  Things look good actually and he’s in talks with a potential acquirer. After a month of analysis and discussion, the investment gets made. 

In the beginning all seems fine. There is some initial growth, some promising leads, but after about 18 months you all realize that nothing is happening. There is no growth and the acquisition talks have broken down long ago. There is also very little communication lately.  You hear that he’s borrowed some money recently and is having trouble paying it back. You fly out to visit him. He’s friendly, but seems evasive, a little down.  He’s gained about 15 pounds since you last saw him. Now what?

QUICK ANALYSIS:

He may have got caught up in other things. He may be having marital problems. He may have made some personal investments in other areas when the going was good but then the market tanked. Remember- as an Angel, you are probably not on the Board and you are a minority shareholder.

             Q: So what are your options?

             A: Welcome to Angel Investing. You have none.

Questions for Discussion:

• So what could you have done differently? Would a convertible note have helped rather than a traditional equity investment?

• Did you really know this person? Did you make reference calls?

• During diligence did you ever meet his family, see his home, see how he lives, what his hobbies are, etc.?

• What does due diligence mean to you?
  

Let's discuss this case study and the questions I've raised.  Looking forward to your thoughts and comments.

For the next post in this Series, click here.

Deal Terms for University Spin-Offs

This is part of my Series on University Entrepreneurship.

 Everyone asks about deal terms at some point, so we may as well address it sooner than later. Let’s say you’ve now visited a few tech transfer offices and you are ready to talk to their New Ventures person about spinning out some IP into a start-up.  What kind of deal terms should you be looking for?

The reality is that every deal is different and so it’s difficult to generate a one-size-fits-all response. Also be mindful that university tech transfer offices across the country vary greatly in their approach to start-ups.

Here are some very general guidelines to a fair deal that you may find helpful, however:

• In most cases you should obtain an exclusive license to the technology in the fields in which you intend to operate

• In most cases you should seek to back-end the economics of the deal and stay away from high up-front license fees

• You should be prepared to partner with the university and let it have an equity stake in the company. (We will have a separate series of posts on equity considerations as there are many nuances here).

• You should mutually agree to some diligence milestones that lay-out time-lines for things like first product sale and in some cases capital-raised or revenue targets. These should have built-in flexibility and not be harsh

• Royalties depend a great deal on the industry in which you’ll be operating but should never be a yoke around your neck- allowing you to operate with a comfortable margin

If you’re not getting a deal done that reflects a win-win you should quickly move on, but such negative outcomes are less and less frequent. More and more offices understand the challenges of launching a start-up and, when a talented entrepreneur is at the table, increasingly have the right approach.

For Part Nine in this Series, click here

Golfing-in-Exile (2): Getting it off the Tee

This is part of my Series on Golfing-in-Exile.

We’ll get deeper into this in subsequent posts, but here are some initial tips for the GIE who plays twice a year and suddenly finds himself in some version of the following. (Tell me you haven’t been a part of this classic situation!):                       

So your friends show up to the course late, they’re still yapping on their iphones about liquidation preferences and getting rid of the CEO and of course, no one could hit balls before the round started.  You’re as tight as a board and haven’t stretched in 15 months. You’ve just seen the people at the clubhouse ring up your card for a $130 greens fee and you had to buy a pair of golf shoes with soft spikes on sale for $110 because the last time you played, hard spikes were still allowed and no one told you this had changed.  You bought a dozen Titleists (most of which you will lose during the coming round) for another $50 and before hitting a shot you’re out about $300.

You step up on the tee, address your ball and VC #1 is still in the cart getting angry at someone he’s talking to on the phone.  Your other hyperactive entrepreneur friend is moving all over the place and clearly visible in your peripheral vision. He almost hit you with one of his practice swings a few minutes ago. VC #2 is wolfing down a sandwich and potato chips not five feet away from you. Since you’re on the East Coast and it’s April, it’s still freezing and you have no “cold weather” gear because again- you hardly ever play golf.

Reality: if you don’t have my “Golfing-in-Exile Rules” memorized- you have a 1% chance of hitting the ball in the fairway.

Here’s what you need to do off the tee: (GIE RULES OFF THE TEE)

• Keep some movement in your body before you initiate the swing. Don’t just stand there like a statue and think you’ll suddenly uncork a 300 yard drive. Move a little, get some rhythm, swagger, etc. going- feel the legs and arms and waggle the club some. A golf swing is actually an athletic movement- so holding perfectly still at address will not help you accomplish this despite what you may think.

• Kick your right knee, (if you are a righty), slightly left toward the target at address, keeping it cocked throughout the swing. This will keep you centered and over the ball with a controlled swing.

• Take a smooth and deliberate backswing. Most disastrous shots (mine included) are born of the warp-speed at which people’s backswings travel, which consequently throws the whole body out of whack.

Ok- so you got it off the tee- it wasn’t great- but you’re out there and not speeding off in your cart cursing to yourself as you hurtle towards your horrific annual round.  VC friend #1 is having a fake heart-to-heart with a CEO he is “letting go” next to you. You can tell he really wants to assassinate the guy for costing him so much money. He sliced his ball into some thick bushes and obviously needs an aspirin.

 Now what? We’ll discuss in the next GIE post.

For Part 3 of this Series, click here.

Golfing-In-Exile "G.I.E." (1) Plotting Our Return

This is part of my Series on Golfing-in-Exile.

You think launching high quality start-ups is tough? Try playing golf sometime. I think the golfers among us will agree that it’s rather well established that golf is a tough sport to master. (For just why this is so, see this recent blog post by Paul Kedrosky and the flurry of comments it generated)

For the rest of you, just walk along the perimeter of any driving range (at a safe distance) and you’ll see a ridiculous show of lunges, swipes, contortions and seizures all parading as someone’s golf swing and you’ll understand right away.  Watch any given foursome tee off in front of you and witness the unfolding of another gran comedia.  And no, I’m not talking about a bunch of octogenarians either- we’ve all been active participants in this kind of slapstick mockery of the game. I’m sure that as I do, you know plenty of decent athletes who play quite often and never seem to improve.

Like most working-stiff entrepreneurs, however, I’m one of those people who hardly gets to play.  And because I can actually “hit-the-ball”, it only makes things worse for me, because I’m always struggling with high expectations when I do get to tee it up. 

I’ve coined a term for people like myself: “golfer in exile” (GIE). 

What I mean is that we’re basically like Napoleon on Elba plotting our return.  You had a few good rounds in the old days, you shot some decent scores, sank some putts- and then “life” caught up to you and took it all away. One day you woke up and became that guy who shanks it two fairways over off the first tee and 4 putts from 20 feet. So how did this happen and what can one do about it?

For those of you interested in this topic, I'll be penning an entire series of which this is the first post.

For Part 2 of this Series, click here.

Five Qualities of Great Entrepreneurs

This is part of my Series on Entrepreneurial Culture.

I mentioned in an earlier post  that I’d eventually share my thoughts about what qualities I think make certain entrepreneurs more successful than others. For me, this isn’t just idle philosophizing. When I invest in companies as an angel, or when I entrust a university spin-off to the hands of an entrepreneur, character judgment has concrete, real world consequences.

Over the years I’ve picked-up on a few key qualities that most successful entrepreneurs possess.  Below are the five such qualities I’ve identified. Keep in mind that these qualities are interrelated.

Extreme Focus & Big Energy: 

Laid-back people, folks who are easily distracted and/or disorganized do not make good entrepreneurs. Those I’ve met who drive businesses to great achievement all possess a single-minded relentlessness and intensity. At times this dedication and energy can border on what mainstream society considers “unhealthy”, but I think this trait is probably required, for better or for worse.

Ability to Do What It Takes and Multi-Task: 

Have you met folks who mention in an off-hand way that “I don’t answer emails at night or on weekends”? Or have you met folks who tell you that “people exhaust me”. How about this one: “I’m good when you give me one thing to do but don’t send me a bunch of stuff at once”. They may be wonderful people, but rest assured, they are not destined to be successful entrepreneurs. Entrepreneurs who excel always do “what it takes” and always make the extra effort.  They can handle multiple tasks on a given day often in an atmosphere of great uncertainty. Perhaps most importantly they can deal with all sorts of personality types and don’t spend psychic energy complaining about how much they dislike so-and-so.

Self-Confidence and Flexibility:

Launching oneself into the realm of the unknown takes a great deal of self-confidence. It presumes that such a person feels he or she is equipped to successfully deal with whatever is thrown their way. New ventures are all about being prepared to address the unexpected obstacles and bad news with which you will inevitably be confronted. Generals say that the battle plan lasts as long as the first engagement with the enemy occurs. Mike Tyson famously said that his opponents’ strategy coming into the ring with him lasted up to point when they first received his fist smashing into their faces. The same is true for start-ups. It’s a game for confident people who can deal with reality. They have to be confident and flexible enough to change their plans and adjust their expectations based on the feedback their business receives where the rubber meets the road.

Communication Skills:

This particular skill is not necessarily required depending on the type of business you have. In the world of consumer internet companies, for example, there are plenty of ultra socially awkward entrepreneurs like Markus Frind (Plenty of Fish) and Tony Hsieh (Zappos) who are well known for their shy and retiring demeanor. However, in the case of both of these gentlemen, it would be hard to find other human beings on this earth who are more driven than they are. (Here’s Markus describing his own killer-instincts and relentnessness: http://bit.ly/4AZDu)

In businesses that require interacting with other human beings in the non-virtual environment, however, I do believe that strong communication skills are a pre-requisite for being a good leader. You need to convince talented people to work with you and you need customers and investors to want to do business with you. Articulate, clear-minded people have a huge advantage over other entrepreneurs who lack these skills.

Enlightened Stubborness:

This is perhaps the most elusive one of all. On one hand I actually do think great entrepreneurs are stubborn. They are stubborn in the sense that when they first struck out on their own they faced down all the people who doubted them and told them not to do it and not to stray from the primrose path of job security. They are stubborn in the sense that when certain people or certain old ways of doing things get in the way of their innovative businesses, they persist and overcome this resistance. And they are stubborn to the core when customers first tell them “No” and when competitors come after them with a vengeance.

So where’s the enlightened part? Well, although I have not actually met someone with this quality in the real world, I believe that the ideal entrepreneur would have an almost preternatural self-awareness lurking inside them amidst all this primitive stubborness. For example, they would have a sixth sense about when things just aren’t working and are flexible and confident enough to change plans. They would seem to know just when they’ve reached the point at which they’ve built the business up to the highest level they were capable of and are suddenly willing to step-aside for a manager with the right management skills to help take the company to the next level. Lastly, they would have the capacity to really listen to respected advisors and to take advice without bristling.

The reality is that no one person has all five of these qualities in abundance. And if they do, they’d probably have a bunch of other foibles that would diminish the effectiveness of the ones I’ve mentioned above.  Integrity, for example, is of paramount importance and the absence of it has been the Achilles heel for a lot of talented entrepreneurs.  My points above should thus be taken for what they are- a general guide born of my own experience and not some kind of definitive checklist.  Ultimately we all use our own judgment about the entrepreneurs with whom we partner or in whom we invest.

For my video conversations with great entrepreneurs: Venture Studio

For my ongoing Series on Entrepreneurial Culture: Entrepreneurial Culture