This is a great deck on how to present in a very time condensed format and win. The idea is not to focus on your technology or how great it is (we know its great!) but to focus on who will pay for it, why they will pay for it, and why they won't spend money with another company to solve this problem.
I've seen so many startups over the years try to cram everything into a short 5-10 minute presenation at every event imaginable. You don't need to say everything at this first shout out to investors. This is a sales pitch for you - just get them interested enough to ask for a meeting. That's really all you can ask for!
http://www.webyantra.net/2009/05/22/excellent-resource-how-to-make-pitches-at-startup-showcase-events/
Friday, May 22, 2009
What are we all striving for - shareholder value?
Some interesting thoughts for the long weekend on how to not get caught up in the eternal pursuit for more money. I have to agree with Jack Welch - "Shareholder value is a result, not a strategy".
Questions I Wish VCs Would Ask Entrepreneurs (Hint: They’re Not About ‘Shareholder Value’)
By Upendra Shardanand - Fri 22 May 2009 08:38 AM PST
Upendra Shardanand is the Chief Executive Officer and Founder of Daylife, which helps publishers add content and inventory without additional staff or engineering. He also co-founded Firefly Network, a spinoff from his work at the MIT Media Lab, and sold the company to Microsoft (NSDQ: MSFT) in 1998. Upendra was the founding partner at the venture firm The Accelerator Group, and was the Director of Technology at Time Warner (NYSE: TWX).
Several years ago, when I was with the Accelerator Group, we were in discussions with a music-industry executive about a music-related venture. At some point he e-mailed a request: He wanted my colleagues and me to send him a list of our favorite bands. A slightly puzzling request, but we complied – who doesn’t like doing a top-10 list? Afterwards, he shared that he was very pleased with our answers – not one gun-toting, life-of-crime musician on the list! Apparently, he had no desire to work with dangerous acts. Life is too short to get shot.
As odd as that question may have been, it was honest and a nice change of pace from the normal litany of questions one gets from partners or VCs. By now I heard hundreds of investor pitches, and every investor seems to be reading off the same crib sheet. They’re all very focused on how best to maximize shareholder value (as opposed to avoiding getting shot, or some other criterion).
It’s long been accepted that the singular objective for any company is to make everyone money. The more the better. And I’ve been in many a discussion where it seems the wisest way to cut to the chase on a strategic business decision is to ask, “OK, but what will most maximize shareholder value?”
So it was interesting to see Jack Welch recently say: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers, and your products.” (I’d personally add suppliers, partners, the environment, and society at large.)
Some buy a trickle-down logic and argue that if it’s good for the shareholders and makes good business sense, then you will end up taking care of all other stakeholders.
Really? In an age where investors and management can get out quick, leaving all the other stakeholders holding the bag, what we end up with is Enron, AIG and Tyco. Those companies may be the extreme examples, but for a long time in the tech industry we’ve had a setup where every dot-com investor and entrepreneur could exit fast and buy that Ferrari, without necessarily having built anything of lasting value. Perhaps more innocuous then Enron, but no less a wasted opportunity to do something truly great.
And companies are like snowballs being rolled down a hill: Once they’ve been pointed in a direction, it’s really hard to change course. A company’s mission only gets watered down with time, its resolve weaker with age.
Perhaps in this era of Obamanomics and global cataclysm, where the maxim of endless growth fueled by endless consumption is being questioned, we’re starting to reset a bit, and the dog is starting to wag the tail. Perhaps we’re starting to see job hunters pursue purpose over money.
Perhaps publications will find new ways to keep score besides who raised how much and who exited for how much. Surely there are metrics other than the dollar by which to judge companies? (Read these words of wisdom on the value of the right metrics from RFK Jr.).
As exit opportunities become scarcer, perhaps entrepreneurs will start attacking hard, long-term projects with real benefits as opposed to get-rich-quick schemes. I once congratulated one of my investors, Scott Heiferman, on the success of his young company Meetup. I was deeply impressed whenever I spotted a Meetup group at a café or Whole Foods cafeteria, and I kept seeing them more and more often. But Scott was visibly irritated.
“Brands or anything that really lasts or matters often take decades to build. We haven’t done anything yet,” he said.
And perhaps boards and VCs will take Jack Welch’s advice and depart from their scripts and start viewing shareholder value as a result, not an objective. I’ll give a discount on the deal if any VC ever asks me questions along the lines of, “what do you do to make your office a fantastic place to work?” or “would you disclose the identity of one of your users to the Chinese government” or “who are you fighting for?”
The things we read, the colleagues we keep, the investors we have. Picking them carefully will determine the measures by which we’re held accountable. Life is too short to get shot.
Questions I Wish VCs Would Ask Entrepreneurs (Hint: They’re Not About ‘Shareholder Value’)
By Upendra Shardanand - Fri 22 May 2009 08:38 AM PST
Upendra Shardanand is the Chief Executive Officer and Founder of Daylife, which helps publishers add content and inventory without additional staff or engineering. He also co-founded Firefly Network, a spinoff from his work at the MIT Media Lab, and sold the company to Microsoft (NSDQ: MSFT) in 1998. Upendra was the founding partner at the venture firm The Accelerator Group, and was the Director of Technology at Time Warner (NYSE: TWX).
Several years ago, when I was with the Accelerator Group, we were in discussions with a music-industry executive about a music-related venture. At some point he e-mailed a request: He wanted my colleagues and me to send him a list of our favorite bands. A slightly puzzling request, but we complied – who doesn’t like doing a top-10 list? Afterwards, he shared that he was very pleased with our answers – not one gun-toting, life-of-crime musician on the list! Apparently, he had no desire to work with dangerous acts. Life is too short to get shot.
As odd as that question may have been, it was honest and a nice change of pace from the normal litany of questions one gets from partners or VCs. By now I heard hundreds of investor pitches, and every investor seems to be reading off the same crib sheet. They’re all very focused on how best to maximize shareholder value (as opposed to avoiding getting shot, or some other criterion).
It’s long been accepted that the singular objective for any company is to make everyone money. The more the better. And I’ve been in many a discussion where it seems the wisest way to cut to the chase on a strategic business decision is to ask, “OK, but what will most maximize shareholder value?”
So it was interesting to see Jack Welch recently say: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers, and your products.” (I’d personally add suppliers, partners, the environment, and society at large.)
Some buy a trickle-down logic and argue that if it’s good for the shareholders and makes good business sense, then you will end up taking care of all other stakeholders.
Really? In an age where investors and management can get out quick, leaving all the other stakeholders holding the bag, what we end up with is Enron, AIG and Tyco. Those companies may be the extreme examples, but for a long time in the tech industry we’ve had a setup where every dot-com investor and entrepreneur could exit fast and buy that Ferrari, without necessarily having built anything of lasting value. Perhaps more innocuous then Enron, but no less a wasted opportunity to do something truly great.
And companies are like snowballs being rolled down a hill: Once they’ve been pointed in a direction, it’s really hard to change course. A company’s mission only gets watered down with time, its resolve weaker with age.
Perhaps in this era of Obamanomics and global cataclysm, where the maxim of endless growth fueled by endless consumption is being questioned, we’re starting to reset a bit, and the dog is starting to wag the tail. Perhaps we’re starting to see job hunters pursue purpose over money.
Perhaps publications will find new ways to keep score besides who raised how much and who exited for how much. Surely there are metrics other than the dollar by which to judge companies? (Read these words of wisdom on the value of the right metrics from RFK Jr.).
As exit opportunities become scarcer, perhaps entrepreneurs will start attacking hard, long-term projects with real benefits as opposed to get-rich-quick schemes. I once congratulated one of my investors, Scott Heiferman, on the success of his young company Meetup. I was deeply impressed whenever I spotted a Meetup group at a café or Whole Foods cafeteria, and I kept seeing them more and more often. But Scott was visibly irritated.
“Brands or anything that really lasts or matters often take decades to build. We haven’t done anything yet,” he said.
And perhaps boards and VCs will take Jack Welch’s advice and depart from their scripts and start viewing shareholder value as a result, not an objective. I’ll give a discount on the deal if any VC ever asks me questions along the lines of, “what do you do to make your office a fantastic place to work?” or “would you disclose the identity of one of your users to the Chinese government” or “who are you fighting for?”
The things we read, the colleagues we keep, the investors we have. Picking them carefully will determine the measures by which we’re held accountable. Life is too short to get shot.
Wednesday, May 20, 2009
More bad news (sorry!) from the Angel Capital Association
Some more bad news (sorry) from the angel investing side this time. THe whole article is below but this is the key info:
But in November, 15.1% of angel groups expected to “invest in a greater portion of existing portfolio companies.” That percentage grew to 32.3% in the latest survey, which seems to mirror the thinking of venture capital firms, which are concentrating more money on their own portfolio companies than in new deals.
Also, in November 23.7% of angel groups checked off “raise a new fund” in 2009. That percentage was cut in half to 12.3% in the latest survey.
http://blogs.wsj.com/venturecapital/2009/05/20/angel-investors-opinions-change-on-economy-investing/?mod=rss_WSJBlog
Angel Investors’ Opinions Change On Economy, Investing
By Scott Austin
The Angel Capital Association, a trade organization for North American angel investment groups, released a survey today that updates the opinions of its members from when they were last polled in November.
The differences between the two surveys - the latest canvassed members in March and April - is minimal in most places, with many of the results fluctuating by just a few percentage points. But there are a few major changes of opinion to highlight.
With the question, “Do you plan any major changes to your group structure or investment process in 2009?” respondents were able to check off up to 11 answers that apply to them. Most of the answers came back relatively the same percentage-wise. For instance, 28% of respondents in the November survey expected to “significantly grow the number of member investors” in their groups, while 29.2% in the latest survey expected to do so.
But in November, 15.1% of angel groups expected to “invest in a greater portion of existing portfolio companies.” That percentage grew to 32.3% in the latest survey, which seems to mirror the thinking of venture capital firms, which are concentrating more money on their own portfolio companies than in new deals.
Also, in November 23.7% of angel groups checked off “raise a new fund” in 2009. That percentage was cut in half to 12.3% in the latest survey.
Further in the survey, respondents show they are more pessimistic about the economy than they were a few months ago but more optimistic they’ll find better deals as a result. With the question, “How long do you estimate the credit crunch/ current market conditions will last?”
35.9% of respondents in November expected the fourth quarter of 2009 while 40.3% said 2010. Now, 26.6% said the fourth quarter and 56.2% believe 2010. However, 23.7% in the newest poll said they “might more aggressively seek new deals on an opportunity basis,” higher than 14.8% from November.
To view the two surveys, click here for the newly released one and here for the one issued on Dec. 1. Besides expectations, the survey also breaks down the investment data for 2008. A few highlights: the average total investment per group in 2008 was $1.77 million, down 9% from 2007; the average number of deals made fell 16% to 6.3; and the average investment per deal rose 4% to $276,918.
One note: the ACA does not represent individual angels, but only angel groups which pool a number of “accredited investors” together under one umbrella and invest their money together. The ACA represents 162 of these groups.
But in November, 15.1% of angel groups expected to “invest in a greater portion of existing portfolio companies.” That percentage grew to 32.3% in the latest survey, which seems to mirror the thinking of venture capital firms, which are concentrating more money on their own portfolio companies than in new deals.
Also, in November 23.7% of angel groups checked off “raise a new fund” in 2009. That percentage was cut in half to 12.3% in the latest survey.
http://blogs.wsj.com/venturecapital/2009/05/20/angel-investors-opinions-change-on-economy-investing/?mod=rss_WSJBlog
Angel Investors’ Opinions Change On Economy, Investing
By Scott Austin
The Angel Capital Association, a trade organization for North American angel investment groups, released a survey today that updates the opinions of its members from when they were last polled in November.
The differences between the two surveys - the latest canvassed members in March and April - is minimal in most places, with many of the results fluctuating by just a few percentage points. But there are a few major changes of opinion to highlight.
With the question, “Do you plan any major changes to your group structure or investment process in 2009?” respondents were able to check off up to 11 answers that apply to them. Most of the answers came back relatively the same percentage-wise. For instance, 28% of respondents in the November survey expected to “significantly grow the number of member investors” in their groups, while 29.2% in the latest survey expected to do so.
But in November, 15.1% of angel groups expected to “invest in a greater portion of existing portfolio companies.” That percentage grew to 32.3% in the latest survey, which seems to mirror the thinking of venture capital firms, which are concentrating more money on their own portfolio companies than in new deals.
Also, in November 23.7% of angel groups checked off “raise a new fund” in 2009. That percentage was cut in half to 12.3% in the latest survey.
Further in the survey, respondents show they are more pessimistic about the economy than they were a few months ago but more optimistic they’ll find better deals as a result. With the question, “How long do you estimate the credit crunch/ current market conditions will last?”
35.9% of respondents in November expected the fourth quarter of 2009 while 40.3% said 2010. Now, 26.6% said the fourth quarter and 56.2% believe 2010. However, 23.7% in the newest poll said they “might more aggressively seek new deals on an opportunity basis,” higher than 14.8% from November.
To view the two surveys, click here for the newly released one and here for the one issued on Dec. 1. Besides expectations, the survey also breaks down the investment data for 2008. A few highlights: the average total investment per group in 2008 was $1.77 million, down 9% from 2007; the average number of deals made fell 16% to 6.3; and the average investment per deal rose 4% to $276,918.
One note: the ACA does not represent individual angels, but only angel groups which pool a number of “accredited investors” together under one umbrella and invest their money together. The ACA represents 162 of these groups.
Very interesting deck on Customer Development
I don't usually write anything but the most brief comments here but this time, I'm going to put out some thoughts on a recent deck by Steve Blank on Customer Development. This terrific deck starts with a basic premise: More starups fail from a lack of customers than from a failure of product development. Those of us who've spent time with seed and early stage startups know for a fact that this is true.
But as Steve mentions, we have no processes to manage customer development. There are tons of resources available to manage the product development process, but the key driver of success, customers, is left out to dry.
He goes on to talk about the First Customer Ship (FCS) date as the goal for startups, which as we know from experience, is generally the case. but I totally agree with him when he says, "You don't know if you're wrong until you're out of business/money".
Download the deck and read his ideas on how to fix this serious problem. He's wise and its great advice.
http://www.stanford.edu/class/msande273/resources/Stanford%20steve%20101805.pdf
But as Steve mentions, we have no processes to manage customer development. There are tons of resources available to manage the product development process, but the key driver of success, customers, is left out to dry.
He goes on to talk about the First Customer Ship (FCS) date as the goal for startups, which as we know from experience, is generally the case. but I totally agree with him when he says, "You don't know if you're wrong until you're out of business/money".
Download the deck and read his ideas on how to fix this serious problem. He's wise and its great advice.
http://www.stanford.edu/class/msande273/resources/Stanford%20steve%20101805.pdf
More bad news from TechCrunch on the state of startups and VC
http://www.techcrunch.com/2009/05/18/crunchbase-data-rocks-too-bad-the-q1-numbers-suck-our-report/
CrunchBase Data Rocks. Too Bad The Q1 Numbers Suck. Our Report
by Michael Arrington on May 18, 2009
We’re all glad Q1 is behind us.
Silicon Valley and the start-up ecosystem certainly was not immune to the general economic malaise. The TechCrunch sweet spot, early-stage start-ups, was particularly hurt.
The number of start-ups getting started was down 65% vs Q1 2008. We saw just 184 new start-ups formed, down from 546 in 1Q 2008.
Start-Ups Founded: January 2008 - March 2009Source: CrunchBase
Early-stage start-ups are working hard to do more with less. The average number of staff at new start-ups founded 1Q 2009 was 6, down from 8 a year ago. How do we know? It turns out that there’s a wealth of interesting facts that we can glean from CrunchBase, our structured-wiki startup directory and primary data source for TechCrunch Research. What else did we learn from CrunchBase?
The $3.1 billion in venture capital financing was down 50% from Q1 2008, though up nearly 25% from Q4.
Venture Capital Financings: January 2008 - March 2009Source: CrunchBase
Here’s the thing, transaction volume was weighted heavily to Series B and later stages of investment, suggesting that VCs were focused on providing additional resources for their top portfolio companies as opposed to new deal flow. By example, only four of the startups founded last quarter also reported the closing of outside funding.
Venture Capital Financings by Stage: 1Q 2008 vs. 2009Source: CrunchBase
(Excluding the New York Times’ $250 million bailout raise by Carlos Slim), the biggest consumer web and mobile financings were: obopay ($70M), Zag ($70M), Twitter ($35 million), Omniture ($25M) and Pocket Communications Northeast ($25M.) Monetization businesses received attention: Tremor Media ($18M), Offerpal Media ($15M) and AdMob ($12.5M.)
Perhaps most telling of all, no acquisitions were announced by Google, Microsoft, Yahoo!, AOL, or Amazon. We can’t remember a fiscal quarter where none of these companies announced even a small transaction. In total, $1.6 billion in M&A was reported for the quarter, down from $11.9 billion in Q1 2008.
M&A Transaction Values: 1Q 2008 vs. 2009Source: CrunchBase
There were a total of 82 exits announced for the quarter, and the number of exits was actually higher than the 73 reported Q1 a year ago. In 2009, dealflow was tactical and modest in size. The two big deals of the quarter were Autonomy’s acquisition of Interwoven for $775 million and Cisco’s acquisition of Pure Digital Technologies (aka the Flip) for $590 million.
M&A lTransactions: January 2008 - March 2009Source: CrunchBase
Despite a number of executive departures and hirings, we’re still waiting to hear new news from big internet media. After budget cuts are complete, what will be the sources of future growth? There is a vast sea of start-ups available at newly rationalized prices.
See the report table of contents and table of exhibits here.
CrunchBase Data Rocks. Too Bad The Q1 Numbers Suck. Our Report
by Michael Arrington on May 18, 2009
We’re all glad Q1 is behind us.
Silicon Valley and the start-up ecosystem certainly was not immune to the general economic malaise. The TechCrunch sweet spot, early-stage start-ups, was particularly hurt.
The number of start-ups getting started was down 65% vs Q1 2008. We saw just 184 new start-ups formed, down from 546 in 1Q 2008.
Start-Ups Founded: January 2008 - March 2009Source: CrunchBase
Early-stage start-ups are working hard to do more with less. The average number of staff at new start-ups founded 1Q 2009 was 6, down from 8 a year ago. How do we know? It turns out that there’s a wealth of interesting facts that we can glean from CrunchBase, our structured-wiki startup directory and primary data source for TechCrunch Research. What else did we learn from CrunchBase?
The $3.1 billion in venture capital financing was down 50% from Q1 2008, though up nearly 25% from Q4.
Venture Capital Financings: January 2008 - March 2009Source: CrunchBase
Here’s the thing, transaction volume was weighted heavily to Series B and later stages of investment, suggesting that VCs were focused on providing additional resources for their top portfolio companies as opposed to new deal flow. By example, only four of the startups founded last quarter also reported the closing of outside funding.
Venture Capital Financings by Stage: 1Q 2008 vs. 2009Source: CrunchBase
(Excluding the New York Times’ $250 million bailout raise by Carlos Slim), the biggest consumer web and mobile financings were: obopay ($70M), Zag ($70M), Twitter ($35 million), Omniture ($25M) and Pocket Communications Northeast ($25M.) Monetization businesses received attention: Tremor Media ($18M), Offerpal Media ($15M) and AdMob ($12.5M.)
Perhaps most telling of all, no acquisitions were announced by Google, Microsoft, Yahoo!, AOL, or Amazon. We can’t remember a fiscal quarter where none of these companies announced even a small transaction. In total, $1.6 billion in M&A was reported for the quarter, down from $11.9 billion in Q1 2008.
M&A Transaction Values: 1Q 2008 vs. 2009Source: CrunchBase
There were a total of 82 exits announced for the quarter, and the number of exits was actually higher than the 73 reported Q1 a year ago. In 2009, dealflow was tactical and modest in size. The two big deals of the quarter were Autonomy’s acquisition of Interwoven for $775 million and Cisco’s acquisition of Pure Digital Technologies (aka the Flip) for $590 million.
M&A lTransactions: January 2008 - March 2009Source: CrunchBase
Despite a number of executive departures and hirings, we’re still waiting to hear new news from big internet media. After budget cuts are complete, what will be the sources of future growth? There is a vast sea of start-ups available at newly rationalized prices.
See the report table of contents and table of exhibits here.
Monday, May 18, 2009
The Harsh Reality on Today's Term Sheets
The harsh reality is that entrepreneurs are getting a rough ride out there these days. Is it really worth raising the small amounts of money that investors are willing to dole out with such negitive terms? You'll have to answer that for yourself...
http://blogs.wsj.com/venturecapital/2009/05/18/what-is-an-acceptable-term-sheet-these-days/?mod=rss_WSJBlog
May 18, 2009, 1:31 PM ET
What Is An Acceptable Start-Up Term Sheet These Days?
By Ty McMahan
Even at a time when venture capital dollars are scarce, some first-time entrepreneurs remain reluctant to lower valuations and find a way to work with investors on terms.
Valuations skyrocketed in recent years – a $15 billion valuation for Facebook Inc. in 2007, for example – but in the past several months, as the public markets crashed, private-company values have fallen hard, by as much as 40% some investors say. If you’re the head of a hot, young start-up seeking capital, you may not agree and hold steadfast to your terms. But is now the time to lower expectations?
As an example, longtime angel investor Michael Cann brings up a story about a first-time entrepreneur who early last year shopped around a term sheet for an online media company. Over the years Cann has studied more than a few term sheets, making investments in secondary ticket operations StubHub Inc. and Viagogo Ltd., as well as Second Rotation Inc., an online marketplace for second-hand electronics.
The terms of this particular deal didn’t interest him. Cann felt the term sheet offered by the entrepreneur was too aggressive and they couldn’t find a middle ground. “Compared to term sheets I’ve seen in the last five, six, seven years, some of the things he was asking for would be outrageous in any economic environment,” Cann said.
In February of this year, Cann spoke to the same entrepreneur. He had yet to close the round and his terms hadn’t budged. The company did manage to raise “a significant amount of money from some very successful executives” last year, Cann said, adding that he presumes they know little about angel investing.
“If he can get someone to invest on those terms, good for him,” Cann said.
Here is a summary of the terms:
- Seeking $4 million on a $12 million pre-money valuation;
- Multiple closes but no warrant coverage for early investors;
- 1x liquidation preference (not participating);
- Series A gets one board seat and the common stock elects the other two;
- No covenants to restrict how money is spent;
- No vesting;
- Founder and CEO immediately starts paying himself a $225,000 annual cash salary;
- Founder and CEO will reimburse himself for $37,500 for legal expenses; and
- Option pool is 8.3% of the common stock
Cann says he would have agreed to the following terms:
- Seeking 2 million on a $4 million pre-money valuation ($4 million in capital gives them too much runway, Cann says);
- Multiple closes but no warrant coverage for early investors;
- 1x liquidation preference (not participating);
- Five board members: Two company employees, two representatives of Series A investors and one outside director selected by both company and investors (not typical for angel rounds, but $2M is a big angel round, Cann says);
- No Typical covenants to restrict which govern how money is spent;
- No vesting CEO and CTO get 25% of their shares up front to reflect value already created, the rest vests monthly over three years
- Founder and CEO immediately starts paying himself a $ $125,000 annual cash salary;
- Founder and CEO will not reimburse himself for $37,500 for any legal expenses; and
- Option pool is 25% of the common stock
Other background to consider: Cann said this is the founder’s first start-up, though he was a successful executive in the online media field at big companies. The founder and CEO own something like 80% of the common stock, and the management team will need to be built out. The company’s service, which is dependent on online advertising, launched in the summer, and the site attracted an estimated 50,000 unique visitors in April 2009.
(Readers, what do you think - given the information above, which terms do you think are fair?)
Kyle Harris, managing director of New York-based early-stage firm LiquidityWorks, said he continues to receive pitches seeking lofty valuations and conditions.
“First-time entrepreneurs are so unrealistic to begin with they don’t know where to move to,” Harris said. “When they can’t counter when we make an offer, we know they have no perception.”
However, Harris sometimes appreciates an aggressive term sheet.
“To be an entrepreneur you kind of have to have an inflated valuation,” Harris said. “You have to believe you have a trillion-dollar opportunity. But, these guys pushing crazy terms are unrealistic and lack experience. They assume funds will write checks on how great they think their idea is. I don’t mind someone being unrealistic as long as they can defend the opportunity.”
Both Cann and Harris cited executive compensation as one of the more tricky terms.
Similar to the founder who approached Cann, Harris said a first-time founder recently presented a term sheet asking to immediately be paid $180,000 in salary.
“The thing that frustrates me is the guy working in a basement with no money, then expects to go to big money,” Harris said. “He basically wanted a huge piece of equity, a huge salary and a guaranteed exit no matter the success of the business. Executive compensation is a flaw.”
http://blogs.wsj.com/venturecapital/2009/05/18/what-is-an-acceptable-term-sheet-these-days/?mod=rss_WSJBlog
May 18, 2009, 1:31 PM ET
What Is An Acceptable Start-Up Term Sheet These Days?
By Ty McMahan
Even at a time when venture capital dollars are scarce, some first-time entrepreneurs remain reluctant to lower valuations and find a way to work with investors on terms.
Valuations skyrocketed in recent years – a $15 billion valuation for Facebook Inc. in 2007, for example – but in the past several months, as the public markets crashed, private-company values have fallen hard, by as much as 40% some investors say. If you’re the head of a hot, young start-up seeking capital, you may not agree and hold steadfast to your terms. But is now the time to lower expectations?
As an example, longtime angel investor Michael Cann brings up a story about a first-time entrepreneur who early last year shopped around a term sheet for an online media company. Over the years Cann has studied more than a few term sheets, making investments in secondary ticket operations StubHub Inc. and Viagogo Ltd., as well as Second Rotation Inc., an online marketplace for second-hand electronics.
The terms of this particular deal didn’t interest him. Cann felt the term sheet offered by the entrepreneur was too aggressive and they couldn’t find a middle ground. “Compared to term sheets I’ve seen in the last five, six, seven years, some of the things he was asking for would be outrageous in any economic environment,” Cann said.
In February of this year, Cann spoke to the same entrepreneur. He had yet to close the round and his terms hadn’t budged. The company did manage to raise “a significant amount of money from some very successful executives” last year, Cann said, adding that he presumes they know little about angel investing.
“If he can get someone to invest on those terms, good for him,” Cann said.
Here is a summary of the terms:
- Seeking $4 million on a $12 million pre-money valuation;
- Multiple closes but no warrant coverage for early investors;
- 1x liquidation preference (not participating);
- Series A gets one board seat and the common stock elects the other two;
- No covenants to restrict how money is spent;
- No vesting;
- Founder and CEO immediately starts paying himself a $225,000 annual cash salary;
- Founder and CEO will reimburse himself for $37,500 for legal expenses; and
- Option pool is 8.3% of the common stock
Cann says he would have agreed to the following terms:
- Seeking 2 million on a $4 million pre-money valuation ($4 million in capital gives them too much runway, Cann says);
- Multiple closes but no warrant coverage for early investors;
- 1x liquidation preference (not participating);
- Five board members: Two company employees, two representatives of Series A investors and one outside director selected by both company and investors (not typical for angel rounds, but $2M is a big angel round, Cann says);
- No Typical covenants to restrict which govern how money is spent;
- No vesting CEO and CTO get 25% of their shares up front to reflect value already created, the rest vests monthly over three years
- Founder and CEO immediately starts paying himself a $ $125,000 annual cash salary;
- Founder and CEO will not reimburse himself for $37,500 for any legal expenses; and
- Option pool is 25% of the common stock
Other background to consider: Cann said this is the founder’s first start-up, though he was a successful executive in the online media field at big companies. The founder and CEO own something like 80% of the common stock, and the management team will need to be built out. The company’s service, which is dependent on online advertising, launched in the summer, and the site attracted an estimated 50,000 unique visitors in April 2009.
(Readers, what do you think - given the information above, which terms do you think are fair?)
Kyle Harris, managing director of New York-based early-stage firm LiquidityWorks, said he continues to receive pitches seeking lofty valuations and conditions.
“First-time entrepreneurs are so unrealistic to begin with they don’t know where to move to,” Harris said. “When they can’t counter when we make an offer, we know they have no perception.”
However, Harris sometimes appreciates an aggressive term sheet.
“To be an entrepreneur you kind of have to have an inflated valuation,” Harris said. “You have to believe you have a trillion-dollar opportunity. But, these guys pushing crazy terms are unrealistic and lack experience. They assume funds will write checks on how great they think their idea is. I don’t mind someone being unrealistic as long as they can defend the opportunity.”
Both Cann and Harris cited executive compensation as one of the more tricky terms.
Similar to the founder who approached Cann, Harris said a first-time founder recently presented a term sheet asking to immediately be paid $180,000 in salary.
“The thing that frustrates me is the guy working in a basement with no money, then expects to go to big money,” Harris said. “He basically wanted a huge piece of equity, a huge salary and a guaranteed exit no matter the success of the business. Executive compensation is a flaw.”
Wednesday, May 13, 2009
This is a GREAT article on differentiation
Great article from David Shen on MeToo startups. Differentiation is a huge key to success in startups - there are some terrific ideas in here.
http://www.dshen.com/blogs/business/
May 12, 2009
The Problem with Early Stage Me-Too Product Startups
I believe the universe of internet businesses has become extremely crowded in the last few years. In the early days, you could come out easily with something new because there weren't that many competitors out there. Now, it's hard to find somebody who isn't working on something similar to what you're thinking about. So competition is fierce and many times you'll find entrenched competitors with a lot of product inertia and a great head start.
The other huge problem is on the consumer side. Consumers are deluged by new products and services all the time. They have overload and just keep to the products they know best, and need to have a really good reason to change and move from another service to a new entrant. We saw this first in the past with email addresses; Yahoo Mail users were hesitant to move because the cost of changing your email address was super high and thus user retention was very high. Now add what makes up our digital lives on services like flickr (all our pictures that we've uploaded for half a decade now), or facebook (our friends are all here, plus their interconnections), or linkedin (our business connections are all here, plus all their historical connections). The cost of moving has become so high because we've invested so much time and effort into those services and we don't want to redo that, let alone adding the cost of learning a new service.
As an early stage investor, I've found that this makes picking companies exponentially harder and it's a shame. I meet a lot of smart entrepreneurs with some really great ideas, but then I do some research online and find that there are others who are working on something similar or in a close enough space to be competitive. Then I start to get worried about their prospects.
You can find tons of books on the subject of competition and winning despite having entrenched competitors. In general, I have found that entrepreneurs are doing what they should be doing to attack a crowded market. These are things like (my thanks to Andrew Chen for helping me with this list):
1. Innovate on the product experience (ie. Posterous vs. Wordpress).
2. Business model changes, where you are going free (or freemium) for a product that's usually subscription (or fixed charge).
3. Changing the market where you're going long tail instead of hitting the larger market (ie. casual games versus hardcore games).
4. Change in distribution model, where you are delivering something as a service rather than a download, or bundled into an existing thing (ie. Facebook app) instead of a standalone thing.
5. Change in branding. An example is where you cater to an upscale prestige market or niche market instead of a mass brand, or vice versa like taking a niche product and making it available to the masses.
6. Create a business that is better, out of a larger part of another business (ie. Lefora created a message board hosting product for those who don't want all the bells and whistles of a full social networking product).
7. Innovate on design, which appeals to those who want a similar product but one that looks/feels better.
8. Offering more features on a product, or customization on product.
And the big, traditional way of taking a new entrant into a crowded market:
9. Mass advertising to gain broad awareness and induce trial and adoption of new product in face of existing competitors.
So I am not saying it's not possible to win against a crowded marketplace. My issue is with early stage startups: in order to win in a crowded marketplace, early stage startups often don't have enough resources to last long enough to compete effectively and win. While a lot of the above can be implemented, growth time is limited by whether or not you have enough capital and revenue to survive until you run out.
To me, if you're developing a me-too product, it's ultimately going to boil down to a marketing game more than in any other situation. You can develop the best product or service, but if nobody knows about it because they're busy using something else, then you're still dead.
So distribution for a me-too product is critical. In the past and present, large corporations could do this because they had lots of money to launch large advertising campaigns. They knew distribution channels and could insert their new product there. They had contacts in their market and it was straightforward to get word out that they had a new product even if it was similar to existing products.
As a new startup, you may not have those channels and contacts established, and certainly you don't have money to spend on advertising plastered on the Superbowl, magazines, online, and elsewhere.
However, once you finish your product using one or more of the strategies above, you need to jump to strategy number 9 as soon as possible and get it out to consumers. You don't have time to wait until people notice you; you need to get noticed.
Some possible ways of doing this:
1. Buy advertising. As an early stage startup, this is the least viable unless you somehow have enough money to do this. Lead gen advertising can be better than CPM based advertising as you'll be able to pay only on a referral, but still this costs money. Let's move onto cheaper alternatives.
2. Marketing that involves barter space. You trade something of value for advertising space on their side. Something of value can be advertising space on your site, or donation to their cause for charities.
3. Word of Mouth Marketing. Contact bloggers, magazines, users and get them to try and talk about your product. Getting in the NYTimes is a big traffic driver, as well as many other national circulation magazines. Online publications like CNet and The Huffington Post can also be great. Twitter is also a great up and coming means for getting your word out.
4. Get distribution partners. Existing companies can add your product on their sites and can help you promote it. This is usually in deeper partnership such that it goes beyond just buying ad space. You look for exclusivity in contracts and features that your product has that enhance an existing company's product and prestige.
5. Viral marketing. This is a very hard avenue to execute, which is to start with a few users and then it blossoms outward to many. Determining how your product can be viral can be an elusive game and if you don't hit on it early, you could waste a lot of time tweaking and hoping that something you create will be virally popular and spread.
In working with a few startups, I am disheartened by the fact that the importance of distribution is still not well understood. The leading thought is that "if I build something great, then everyone will come find me." Unfortunately, that is rarely the case in this crowded marketplace, and most early stage companies don't have enough time to let people just wander around until they find out about the product.
They did not do enough work to go out and contact bloggers. They didn't go out and try to woo corporate partners to see if they would help them get their message out. They just waited for users to come and they didn't come in great enough quantity to support their business by the time their money ran out.
So don't let your product fail simply because you can't induce trial. Remember, you have developed a me-too product, one that users already have a solution for and switching costs and barriers may be too high for them to take action to look for a better solution. You need to get them to know that your solution exists, and attract them to try it out - and since you're an early stage startup, you need to do this ASAP to give yourself enough time to let consumer adoption grab hold and ultimately take off, all before your money runs out.
http://www.dshen.com/blogs/business/
May 12, 2009
The Problem with Early Stage Me-Too Product Startups
I believe the universe of internet businesses has become extremely crowded in the last few years. In the early days, you could come out easily with something new because there weren't that many competitors out there. Now, it's hard to find somebody who isn't working on something similar to what you're thinking about. So competition is fierce and many times you'll find entrenched competitors with a lot of product inertia and a great head start.
The other huge problem is on the consumer side. Consumers are deluged by new products and services all the time. They have overload and just keep to the products they know best, and need to have a really good reason to change and move from another service to a new entrant. We saw this first in the past with email addresses; Yahoo Mail users were hesitant to move because the cost of changing your email address was super high and thus user retention was very high. Now add what makes up our digital lives on services like flickr (all our pictures that we've uploaded for half a decade now), or facebook (our friends are all here, plus their interconnections), or linkedin (our business connections are all here, plus all their historical connections). The cost of moving has become so high because we've invested so much time and effort into those services and we don't want to redo that, let alone adding the cost of learning a new service.
As an early stage investor, I've found that this makes picking companies exponentially harder and it's a shame. I meet a lot of smart entrepreneurs with some really great ideas, but then I do some research online and find that there are others who are working on something similar or in a close enough space to be competitive. Then I start to get worried about their prospects.
You can find tons of books on the subject of competition and winning despite having entrenched competitors. In general, I have found that entrepreneurs are doing what they should be doing to attack a crowded market. These are things like (my thanks to Andrew Chen for helping me with this list):
1. Innovate on the product experience (ie. Posterous vs. Wordpress).
2. Business model changes, where you are going free (or freemium) for a product that's usually subscription (or fixed charge).
3. Changing the market where you're going long tail instead of hitting the larger market (ie. casual games versus hardcore games).
4. Change in distribution model, where you are delivering something as a service rather than a download, or bundled into an existing thing (ie. Facebook app) instead of a standalone thing.
5. Change in branding. An example is where you cater to an upscale prestige market or niche market instead of a mass brand, or vice versa like taking a niche product and making it available to the masses.
6. Create a business that is better, out of a larger part of another business (ie. Lefora created a message board hosting product for those who don't want all the bells and whistles of a full social networking product).
7. Innovate on design, which appeals to those who want a similar product but one that looks/feels better.
8. Offering more features on a product, or customization on product.
And the big, traditional way of taking a new entrant into a crowded market:
9. Mass advertising to gain broad awareness and induce trial and adoption of new product in face of existing competitors.
So I am not saying it's not possible to win against a crowded marketplace. My issue is with early stage startups: in order to win in a crowded marketplace, early stage startups often don't have enough resources to last long enough to compete effectively and win. While a lot of the above can be implemented, growth time is limited by whether or not you have enough capital and revenue to survive until you run out.
To me, if you're developing a me-too product, it's ultimately going to boil down to a marketing game more than in any other situation. You can develop the best product or service, but if nobody knows about it because they're busy using something else, then you're still dead.
So distribution for a me-too product is critical. In the past and present, large corporations could do this because they had lots of money to launch large advertising campaigns. They knew distribution channels and could insert their new product there. They had contacts in their market and it was straightforward to get word out that they had a new product even if it was similar to existing products.
As a new startup, you may not have those channels and contacts established, and certainly you don't have money to spend on advertising plastered on the Superbowl, magazines, online, and elsewhere.
However, once you finish your product using one or more of the strategies above, you need to jump to strategy number 9 as soon as possible and get it out to consumers. You don't have time to wait until people notice you; you need to get noticed.
Some possible ways of doing this:
1. Buy advertising. As an early stage startup, this is the least viable unless you somehow have enough money to do this. Lead gen advertising can be better than CPM based advertising as you'll be able to pay only on a referral, but still this costs money. Let's move onto cheaper alternatives.
2. Marketing that involves barter space. You trade something of value for advertising space on their side. Something of value can be advertising space on your site, or donation to their cause for charities.
3. Word of Mouth Marketing. Contact bloggers, magazines, users and get them to try and talk about your product. Getting in the NYTimes is a big traffic driver, as well as many other national circulation magazines. Online publications like CNet and The Huffington Post can also be great. Twitter is also a great up and coming means for getting your word out.
4. Get distribution partners. Existing companies can add your product on their sites and can help you promote it. This is usually in deeper partnership such that it goes beyond just buying ad space. You look for exclusivity in contracts and features that your product has that enhance an existing company's product and prestige.
5. Viral marketing. This is a very hard avenue to execute, which is to start with a few users and then it blossoms outward to many. Determining how your product can be viral can be an elusive game and if you don't hit on it early, you could waste a lot of time tweaking and hoping that something you create will be virally popular and spread.
In working with a few startups, I am disheartened by the fact that the importance of distribution is still not well understood. The leading thought is that "if I build something great, then everyone will come find me." Unfortunately, that is rarely the case in this crowded marketplace, and most early stage companies don't have enough time to let people just wander around until they find out about the product.
They did not do enough work to go out and contact bloggers. They didn't go out and try to woo corporate partners to see if they would help them get their message out. They just waited for users to come and they didn't come in great enough quantity to support their business by the time their money ran out.
So don't let your product fail simply because you can't induce trial. Remember, you have developed a me-too product, one that users already have a solution for and switching costs and barriers may be too high for them to take action to look for a better solution. You need to get them to know that your solution exists, and attract them to try it out - and since you're an early stage startup, you need to do this ASAP to give yourself enough time to let consumer adoption grab hold and ultimately take off, all before your money runs out.
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