Harley Finkelstein is a Guest Contributor.
The last ice age, albeit millions of years ago, caused the extinction of the Dinosaur population on earth. In the recent business climate I have been asking myself when the current dinosaurs are going to leave us. What dinosaurs am I speaking about? How about these supposed ‘business minds’ that decided it was time for handouts from the same public that needed it the most. As a student of Economics I can appreciate the trickle down or ‘Reaganomic’ effect of assisting big industry, but aren’t we curbing our entrepreneurial survival instincts by holding our hands out?
As I drove down Bay Street this morning I could sense the melancholy of job losses and recession dialogue (and the snow storm didn’t help). But when I got to my computer and began working for the day it seemed that my inner sanctum of friends and business associates were engaged, excited and optimistic about their growing ventures. My companies, like those of my peers’, don’t have the luxury of a public bailout, so we remain resourceful and brainstorm for creative tactics and new competitive advantages. And why do we this? Because we have no freakin’ choice. The element of survival of the free market through capitalism is skewed when the likes of Chrysler are blessed with golden parachutes that contain billion dollar loans, loose covenants and targets, and some of the most subjective language ever seen in the lending sector; “[The big 3] must prove to be ‘viable’ by March 31st, 2009”. What does viable mean? Well, for me (and I hope most other hardworking entrepreneurs) it means building strong and sustainable businesses that can survive without being reliant on lenders. For the U.S. auto industry however, viable simply means a positive cash flow, regardless of profitability, debt load from other sources, or even solvency.
So to those of you out there who are not only surviving this downturn but bettering your business through resilience and resourcefulness, ‘shoot that puck’! And to those dinosaurs out there waiting for things to go back to ‘the way they were’, maybe it’s time to reflect on how you got started in business…otherwise extinction may be coming.
My previous post was about how it takes about a decade longer to exit in companies with venture capital investors.
That's much longer than most entrepreneurs and angel investors would guess.
Most VC funds are designed for ten year lifetimes. In actual practice, it takes significantly longer to actually exit the investments and shut down the typical IT VC fund.
The actual distribution of VC fund lifetimes is show in the graphic below.
The rest of this post explains why entrepreneurs often scare off angel investors by saying they are planning on a VC round.
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
My previous post showed how the math behind venture capital funds determined venture capital exit times. The post included a simple model to show what the median exit times really meant to entrepreneurs and angel investors.
That model illustrated how the decision to accept equity from venture capital investors statistically extends the time to exit for the angels by something around 12 years.
The graph below illustrates that happens to the time to exit, and probability of exiting, without and with venture capital investors. This graphic shows this from an angel investor's perspective. The times are even longer for the entrepreneurs and friends and family investors.
The model, and the graphic below, illustrate a typical startup where if the board decided to exit before accepting VC investment, it might have been sold around year six - four years after the angels invested. But when venture capital investors are added to the corporate DNA, the time to exit extends to somewhere around year sixteen, twelve years after the angels invested.
The rest of this post explains more. This is also a core message in my new book: Early Exits - Exit Strategies for Entrepreneurs and Angel Investors - But Maybe Not VCs.
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
My two previous posts described how venture capital investors will want to invest too much and then exit only for very high returns.
Why are those bad things for entrepreneurs and angel investors?
They can be very bad because they make:
1. Venture capital exit times extremely long - much longer than you probably realize
2. The risk of actually achieving an exit increase dramatically
This post describes why these factors make venture capital exit times so long.
If the successful venture capital investments need to return 30x on average, or at the very least 10x, to generate a minimum VC return of 20% per year, how long will the VC fund have to hold the investment before an exit?
The graph below shows how many years it takes to generate a minimally acceptable VC fund return from the winning investments.
Some companies will create increases in share value faster than 30 or 40% per year, but these are extremely rare. Everyone who has run a company knows that generating consistent 30 to 40% annual increases in value requires a great deal of hard work and some luck.
This is especially true when you realize that these are not just the increases in the overall enterprise value, but instead the increase in the per share value of the company. The difference is the additional dilution from any future financings or employee equity plans.
The 8 to 10 years shown in the graph above seems almost impossibly long. Could it really take that long?
The rest of this post on Venture Capital Exit Times shows actual data on venture capital exit times and describes what this really means for entreprenuers and angel investors.
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
Why the Size of Venture Capital Funds Matters to Angels and Entrepreneurs
My previous post was titled Venture Capital Firms Are Too Big. That post provides one important piece of data necessary to answer the really important question of why the size of venture capital funds matters to angel investors and entrepreneurs. This post describes the second key element.
Venture Capital Fund Math
Peter Rip of Leapfrog Ventures describes some of the math behind venture capital funds in a fascinating post titled ‘Traditional Venture Capital Sure Seems Broken – It's About Time.’ It provides some outstanding insight into how the math behind venture capital funds affects the way venture capital fund managers make investments and how they behave after they invest.
This post is a high level summary of how the math works for a typical venture capital fund.
In a Typical Fund the Returns are From 20% of the Investments
In a typical VC portfolio, most of the returns are from 20% of the investments. This is just a statistical fact - a law of nature. Statistically, if a VC makes ten investments, two will be winners and create most of the gains in the fund.
The Minimum Respectable Return on a VC Fund is 20% per year
A minimum 'respectable' return for a VC fund is 20% per year. This is set by the expectations of the investors in VC funds, the relative risk levels compared to other investment classes and the performance achieved by other venture capital fund managers.
What this Means for Angels and Entrepreneurs
This minimum acceptable return has profound implications for entrepreneurs and angel investors. It means that if company has venture capital fund investors, they will almost certainly block an opportunity to sell the company unless the price gives the VCs a 10 to 30x return.
The rest of this post explains more of the math behind venture capital funds.
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
Many bloggers have been saying recently that the VC Model is Broken. One of the most important reasons is that Venture Capital Firms are just too big.
Why Venture Capital Firms Got Too Big
In the 20th century, technology companies often required tens or hundreds of millions of dollars to build out and prove. Companies like Intel, Microsoft, Amazon and Google required hundreds of millions of dollars to scale up to the size where they were proven winners. This was one of the factors that led to venture capital firms becoming ever larger.
Being a VC fund manager was also a great job for the fund principles, once the fund was large enough. Most VC funds are structured so the fund managers charge a management fee of about 2.5% of the value of the fund each year. The management fee pays the salaries of the fund managers and their support staff. A small VC firm usually has four partners and some support staff. This means that the annual operating budget for even a small fund quickly grows to more than $2 million per year.
Most VC managers believe a fund under $100 million isn’t economical. The goal of most VC managers is to grow the fund to several hundred million, in part, because then they can start pull down some very attractive compensations. This is another reason that venture capital firms have continued to grow.
The graph below shows how these trends have led to the phenomenal growth in the size of venture capital firms over the past 30 years.
Each VC Partner is Managing More and More Money
As VC funds have grown larger, the amount of money that each VC principle has to invest has grown even faster. Most VC funds can't invest less than a few million in each portfolio company.
What This Means for Entrepreneurs and Angel Investors
This necessity for venture capital firms to invest more and more in each company has profound implications for entrepreneurs and angel investors.
For most startups it means that venture capital firms probably aren't the best source of funding - or that they aren't even a desirable source of funding. The full post, on Venture Capital Firms Are Too Big, begins the explanation of why this is. This is also an important part of my upcoming book: "Early Exits - Exit Strategies for Entrepreneurs and Angel Investors - But Maybe Not VCs".
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
I attended the recent Salesforce.com Users conference last week which is now aptly called Dreamforce. Aptly because the overwhelming theme this year, was the ‘Cloud’ and I suppose most dreaming takes place in the clouds.
It’s a gathering that attracts almost 10,000 which is held in San Francisco. This is my second trip there, but the first as an attendee, and in particular for their Partner Summit. The perspective as an attendee is certainly a different one for me, running from one session to another, makes exhibiting actually seem like a breeze.
Salesforce.com marketers rank among some of the best in B2B marketing, and the best practices sessions were very good. These marketers know how to run campaigns, and measure everything. Email marketing is assumed, and marketing automation like ActiveConversion is quickly being adopted. Aggressive doesn’t even describe the kind of energy that the marketers here exude. You wouldn’t want to be marketing against these guys, unless you’re a Salesforce.com marketer as well.
With over 220+ booths, and a packed schedule, it was hard just to get 2 hours in to do the expo justice, as aisle after aisle of Salesforce.com AppExhange partners hustled their SaaS offerings. AppExchange partners integrate their offering with Salesforce.com to produce marketing automation solutions, hosting, integrated email, data cleansing etc. You name it, and it was probably here. Award for the newest innovation at the expo from me goes to Zuora, which is a billing platform for Appexchange partners.
Force.com, which is their platform for creating applications in the cloud, is still a primary focus. I was at the introduction last year, but now I’ve seen and met people actually on it. It has traction, if for no other reason than Microsoft, IBM, Google or anyone else really has a platform for Cloud Computing. Microsoft has announced, but without a credible presence in SaaS, they will need to do some catching up.
There didn’t seem to be much Canadian representation at the expo, except for the CRMfusion guys from Toronto who do a great job of data cleansing with their product. I did meet a number of Canadians that were attendees. Ian Hayes of Breakeven Solutions was particularly noteworthy, as he runs a company that helps non-profits (exclusively) use Salesforce.com effectively. A great idea, and in a way, a great cause.
There were 3 keynote speeches, each taking 2 hours by Marc Benioff (Salesforce CEO), Michael Dell and Malcolm Gladwell (Tipping Point). And the ‘Global Gala’ featured the Foo Fighters for 2 hours of classic rock. An absolutely packed agenda.
A lot to Dream in 2.5 days. But if you ever get the chance, and particularly if you're a Salesforce.com user, it’s well worth going.
ActiveConversion is the technology leader in total marketing measurement (TMM) and demand generation for SMBs. We help companies manage marketing... [more]
Salesforce.com is the worldwide leader in on-demand customer relationship management (CRM) services. More companies trust their vital customer and... [more]
Basil Peters is a Techvibes Guest Contributor.
Whenever I hear an entrepreneur, or angel investor, say “early exit” they have a huge smile on their face. Even my VC friends beam when they talk about getting lucky with early exits. Almost everyone wins in an early exit – the entrepreneurs, the employees and the angel investors certainly do. I do acknowledge there might be times when an early exit might not good for the venture capital investors.
When I did my first post on early exits last week – all of the comments were negative. Google produces surprisingly few hits on the keywords “early exits”. More common are the keywords “built to flip” – and most of that writing is also negative. So what’s going on here? In my opinion, it’s just a byproduct of our human resistance to change – to progress. The internet has accelerated everything – product and company development cycles, investor time horizons and employee attention spans.
In this article, I develop the idea that early exits are a natural consequence of the internet. And that the trend is still accelerating. The internet has given entrepreneurs an unprecedented opportunity to rapidly launch and exit their startups. The most successful entrepreneurs, directors and investors will find ever better ways to design and execute early exits.
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
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.
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
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.
Angelblog propagates best practices for entrepreneurs and angel investors. [more]
