This post is dedicated to a team of promising young entrepreneurs who asked me recently if they could all just "put some money in a bank account" to launch their startup.
I wanted to say 'yes' because I know how much other work they have to do to build a successful company. But instead I had to warn them that there were several essential elements of their corporate structure they had to get right now to maximize their probability of success.
This question comes up frequently, so I started a list to help other entrepreneurs ensure they don't miss one of the essential structural components.
As soon as I started typing out the first draft of the list, I realized I was trapped. I've been part of several dozen startups and invested in a couple of dozen more. I've seen many startup structural errors that cost entrepreneurs much, or all, of their investment. I often talk with other angel investors about promising young companies that would be fundable if it weren't for the structural problems. So I am supposed to know better.
I realized that if the list I assembled wasn't complete, and as a result a company got started with a structural flaw, I would feel terrible. So I worked hard to ensure the list was comprehensive.
One part of the trap was that the list kept growing and growing. I kept thinking to myself, "This can't really be necessary this early" but then remembered previous examples that proved that wrong. I spoke to a couple of other startup veterans and they added more points to the list.
Now this list of the essential startup action items has over 50 items. It was so long that it was actually discouraging. That was the other part of the trap. If you write it all down, it does look pretty daunting.
But at least now there is the start of a list that entrepreneurs can use to check their progress. I hope that it saves a few dozen young companies from making the easy-to-avoid fatal, or expensive, mistakes.
If you think of any additional essential startup action items, please post a comment or send me an email. I hope that in a year or so, the list will be complete (and still under a 100 items.)
This is the "Essential Startup To Do List".
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
Basil Peters is a Techvibes Guest Contributor. All of a sudden, it seems like angel investing - and startups - are exploding in Vancouver. I remember going to the first Vantec and Vancouver Angel Forum meetings in the late 1990’s, and I’ve been to most of them since. The number of attendees, and number of presenting companies, has stayed pretty constant over the past decade. But in the last few months something seems to have changed. I received an email from Mike Volker, the founder of Vantec, yesterday. I was expecting his regular monthly meeting announcement, but was surprised to read that instead of the regular 3 or 4 presenting companies, there would be 15. So many startups want to present that Mike decided to let them pitch twice, once at the regular time in the morning of July 8 (from 8 to 11 AM) and once the afternoon before (July 7 from 2 to 5 PM). He is running the meeting twice so there will be enough seats for all the angels he expects to attend. Instead of our regular 90 minute meeting, it’s now almost a half day. And this is for the meeting in July – when you’d expect attendance to have started to drop off for the summer. The last Vancouver Angel Forum meeting was also the largest I can remember. I’ve been presenting one of the seminars for New Ventures BC for several years and this year the attendance of aspiring entrepreneurs was about double what it had been in any previous year. This dramatic increase in startup and angel activity is a fascinating development at a time when VCs in Canada very rarely fund startups and when most VCs are having trouble raising new money for their funds. If you are an angel investor, or accredited investor interested in angel investing, this is the link to Vantec where you can get more information on the July 7 & 8 meetings. I’ve also started a new group on Facebook called Angel Investors in Vancouver. Its open to anyone and I encourage you to join
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
Basil Peters is a Techvibes Guest Contributor.
Contrary to general opinion, BC and Alberta entrepreneurs and investors produce excellent returns from our tech companies. One of ways we do this is by being better than any other province, or state, at early exits.
Yes, we sell our companies earlier than anyone else. And that’s a good thing – a very good thing. It generates higher returns.
This is not an opinion. It was proven by an excellent study lead by Thomas Hellman at the UBC Sauder School of Business. The study is available here.
This study concluded: “British Columbia and Alberta are the two most profitable jurisdictions across all of Canada and the US when evaluated against R&D spending.”
This is exactly what happened in my early-stage venture capital fund, the BC Tech Fund. In that portfolio, I invested in nine companies. Three years later, three companies had achieved a liquidity event – one went public and two were acquired. Those early exits did wonders for the returns on that fund. From the information available, while I managed the BC Tech Fund, it the highest performing retail tech venture capital fund of its vintage in Canada. (The top performer of all types is also a BC Advantage Fund – Jim Heppell’s early stage life sciences fund.)
There are lots of great examples of hugely successful early exits in BC. Club Penguin, OctigaBay, Brightside and Flickr are profiled on this page in AngelBlog on early exits in BC. If you know of another early exit winner that should be included on that page, I’d really appreciate an email so I can update the list.
Basil Peters is a Techvibes Guest Contributor.
Over 90% of successful tech companies are financed in pretty much the same way:
The Friends and Family financings are always the easiest to complete - often taking less than two months from start to finish. Friends and Family rounds usually raise $25,000 to $150,000 in total – the amount depends a lot on who your friends and family are.
The only problem is that most people who invest in Friends and Family financings probably shouldn’t.
Even worse, well meaning but inexperienced, entrepreneurs often treat their friends and family investors unfairly, and cause considerable damage to their startup and future funding opportunities.
The entrepreneurs don’t do this intentionally - it’s most often just a by-product of entrepreneurial enthusiasm.
The most common way entrepreneurs get into trouble and end up treating their friends and family unfairly is by over-valuation. This causes serious structural problems that must be rectified before the next round of financing. Some of the ways to avoid this common mistake, and to fix it if necessary, are described at this link on startup funding valuation.
All financings and share sales are governed by securities legislation. Entrepreneurs must know what the legal requirements are before accepting that first dollar of investment, even if it's from a family member. An outline of startup funding legal requirements is available here.
More information on startup funding can be found on AngelBlog.
Basil Peters is a Techvibes Guest Contributor.
It’s surprising how often first time entrepreneurs will set out to find a ‘venture capitalist’ to fund their startup.
These days, fewer than 1% of startups are funded by VCs. In the early 90s, about 20% of US venture capital was invested in startups and seed stage companies. For the past several years, that number has been less than 2%. In the US, only 200 companies per year receive seed/startup investment from venture capitalists. In BC, depending on your definition, there are probably about two startups funded by VCs each year.
Successful entrepreneurs will eventually figure this out, but they can save a lot of time targeting the investors most likely to fund their startup.
Over 90% of successful startups are funded in the same way:
Friends and Family are most often the first source of financing for a startup because they already know and trust at least one of the entrepreneurs. The challenge with most friends and family financings is that the total capital available is only in the range of $10k to $100k. This can get a startup going, but won’t let it get very far.
It’s a common misconception that VCs fund startups. I didn’t really appreciate this myself until I had been a VC for a few years. The problem with VCs funding startups is that to be economically viable a VC fund has to have at least $100 million. (I didn’t really appreciate that either until I had been the CEO of a VC fund for a couple of years.) A typical partner in a VC fund can only manage 5 to 7 investments. A $100 million fund might only have four or five partners. These constraints and some simple math mean that a VC has to invest about $4 to 5 million in each portfolio company. Even if they invest over multiple rounds, the first cheque should be $1 to $2 million.
Even if a startup thought, “No problem, I’ll take $2 million”, the math still doesn’t work. To be able to reasonably accept that much capital means the startup would have to be valued at above $5 million. Today, reasonable valuations for startups are much lower (unless they have very extensive patent portfolios).
That’s why over 90% of startup funding comes from angel investors (excluding government programs). Angel investors are high net worth individuals who have often made their money by being entrepreneurs. Individual angels typically invest $10k to $100k in a company. Angels usually syndicate, or co-invest, which means that companies can raise amounts from $250k to $2 million from angel investors.
This is usually enough capital to fuel the successful companies to valuations above $5 million and be reasonable candidates for VC or public venture capital financing.
Angel investors are not as easy to find as VCs. The good news is that there are a few efficient ways to introduce your startup to angels. This link provides a good summary of best practices for entrepreneurs looking for angel investors in Vancouver.
