April 14, 2010
A few of my favorite entrepreneurial groups (NC Spark and TheFunded.com) have been buzzing in recent weeks about the current Chris Dodd financial reform bill. I submitted my support for one of the online petitions collecting signatures against this proposed legislation this evening. I am strongly against the suggested 120 day waiting period before a startup could receive funds raised from investors. I am also strongly against the increased bar on accredited investor status which is proposed to be raised from $1M in net worth to over $2M in net worth. Some estimates say that the accredited investor requirement change would remove nearly 70% of the options that startups have when raising money from wealthy individuals referred to as angels. Here are the details I included as I signed the petition this evening:
Adding anything that slows down the process of raising investment capital for startups is counter productive. These companies embody the American Dream and the current flexibility in the system attracts innovation to our country. A 120 day waiting period and a higher bar for accredited investment status will slow innovation and job creation in startups in this country. In this economy, as we are all starting to dig our way out, these new restrictions pose one more challenge to new ventures.
Below is the message that TheFunded.com sent out to its nearly 15,000 members this evening. Please get involved, sign the petition, and spread the word about all of the damage that this proposed legislation would do if it becomes law. The brilliant entrepreneurs who create new ventures don’t need anything else making the challenge even more difficult and our community doesn’t need another roadblock standing in the way of new job creation.
Save Angel Investing
The US Senate Committee on Banking chaired by Senator Chris Dodd of Connecticut is proposing changes to angel investing buried within the “Financial Reform Legislation” on the floor of the Senate now. The reforms will effectively double the standard to be an “accredited investor” in the US, which most estimate will reduce the pool of accredited investors by over 70%. Additionally, the proposed legislation requires that financings, whether accredited or not, must be registered with the SEC, and the SEC has up to 120 days to respond. If the SEC does not respond, the financing goes to the applicable State organizations for review.
Reducing the number of accredited investors, slowing down the investment process significantly and adding considerable cost to small financings will decimate angel investing. For all US Members, unless you want to wait for months to get a wire after your next financing is closed, please take a moment to spread the word and call Senator Dodd, as well as your own State Senator.
- Amend Section 926 to exempt startups from SEC filing, state regulation, and 120-day review.
- Strike Section 412 to prevent 77% of current angel investors from losing their accreditation.
CALL SENATOR DODD:
- DC: 202-224-2823
- CT: 800-334-5341
TWITTER HASH TAG:
June 27, 2009
I’ve spent the last few weeks, in the occasional moments of downtime, reading through the NVCA’s four pillar plan for reopening the IPO markets with the goal of restoring liquidity to Venture Capitalism. Any executive or board member of a venture backed startup doing $20M in annual revenue or more should get really familiar with this content. The NVCA’s efforts along these lines will be important input to your financing strategy for the next 2-3 years.
Here’s my summary of the four pillars:n
1) Ecosystem Partners: Working with the global investment banking and accounting firms to help them develop programs that are more relevant to small cap companies. One method discussed is encouraging smaller boutique investment banking firms to provide ongoing coverage and research on small cap companies in exchange for fasttracking the boutique bankers as co-leads when the VC backed firms go public.
2) Enhanced Liquidity Paths: Improve efficiency in the crossover between private and public markets by connecting pre-IPO firms with committed investors which makes the IPO process easier on the company and reduces post-IPO volitility.
3) Tax Incentives: Extend capital gain holding period to 2 years (from one year now) and implement short term tax incentives to stimulate IPOs.
4) Regulatory Review: Review SOX and reduce regulation of pre-public and smaller public companies by fine tuning the abuse controls that were created to keep large companies honest.
To see the plan or to get some more context on the situation check out the following sources:
- Q&A with Dixon Doll, partner at Venture Capital firm DCM, outgoing Chairman of the NVCA, and major contributor to the NVCA’s Four Pillar Plan.
- Press release announcing the NVCA Four Pillar Plan to restore liquidity to the US Venture Capital Industry. The release includes a nice outline of the four pillars that can be read in less than five minutes.
- Online version of the NVCA Presentation of the Four Pillar Plan to restore liquidity to the US Venture Capital Industry.
December 19, 2008
The National Venture Capital Association is reporting the results of a recent survey of Venture Capitalists in which 60% of VCs believe that a drop of venture capital investments of 10% or more will occur in 2009. Also, the President of NVCA feels that 2010 will be a better year for Venture Capital as investments in private companies are expected increase alongside expecations of reopening IPO markets then.
Many VCs I’ve talked to recently feel like their industry is in real trouble but on the flip side just as many feel like now is a great time to get a deal on a struggling company. I guess one of those opinions will prevail based on how flexible entrepreneurs are willing to be with their company valuations. When Sequoia got their CEOs together a few months back in order to scare them profitable with pictures of pig carcases and economic graphs that would have put Alan Greenspan to sleep they clearly were warning against the risk of a down round if the companies burned to the bottom of their cash piles.
In the same way that the challenging economic environment right now will drive companies out of business across a wide variety of industries who rely on institutional investors, the VCs are also in this boat. They of course are just focused investment vehicles primarily for large endowments in the private and public sector. As those endowments miss cash calls (because of their recent losses in other investment categories) from the VCs some firms will not be able to properly support even their existing portfolio companies. As their portfolio fails so will the firm over time.
I know of a few small VC firms in real trouble right now. Many are essentially non-operational although still technically in business. Some of the larger VC firms are shedding associates right now to cut costs considering the typical job of turning up leads for dealflow isn’t really needed right now… because the firms aren’t planning on putting any money to work anyway.
Additional Note (1/2/2009): Forbes.com has a great article with more details on what they call “Venture Capital’s Coming Collapse.” At the very end of the article (on page three) is a point I think is very valid and reflects a bit of what may ultimately happen in the auto industry (whether right or wrong)… a mention that a consolidation of VC firms (ie: the demise of the lower performing firms) would lead to generally higher returns across the industry.
From the numbers it does appear that mediocre VC funds are not worth a 2% management fee or any management fee at all. A long term 5% fund gain is just terrible considering the risk. The Forbes article mentions that “the median return for all venture funds was just under 5%, or worse than what Treasury bonds would have given you.”
The Forbes article is also a bit unfair since it mentions lots of fund IRR (Internal Rate of Return) percentages for incomplete funds. VC funds, because of their risk, can be extremely upside down through a significant portion of the life of the fund. More interesting numbers here would probably be some trending information on the average length in years of funds (for which general knowledge is telling us that it has been extending in recent years and certainly currently with no IPO market) and also the average percentage of a good fund’s life (maybe defining a good fund as one with an IRR of 10% or greater at its close) that it spends with a negative IRR. Also the average negative IRR for those good funds during their negative IRRs phase (or phases possible?) would also help us evaluate this further. Based on my recollection I would assume that even the good funds have a negative IRR through at least 30% of their lifetime. Anyone have any of this data?
A few more articles came out today highlighting the low point in VC liquidity since 2003 (five years). One of them calls it the complete death of IPOs and the other calls it the lowest point since the tech bust. As an interesting aside the VC market doesn’t look that bad in this article where Mark Heesen of the NVCA mentions that although Q4 2008 venture fund raising was slow ($3.4 billion down from $8.4 billion from the previous quarter and $11.7 billion from Q4 2007) that many funds raised earlier in 2008 and in 2007 and thus because of cyclical timing in addition to economical timing the Q4 raise number is expectedly low.
Mark Heesen is shedding some light on the VC market’s long term gains today in a report stating that the 10 and 20 year VC gains remain around 17%. Right now is a good time to be quoting long term gains in any industry
September 12, 2008
A post on TheFunded.com yesterday requesting information on typical Founders Ownership Percentages in startups caught my attention. One of the comments within pointed me to Noam Wasserman’s Founder Frustrations blog and a specific post on the average equity advantage of entrepreneurs who bring “the idea” to a startup that contained some great information that wasn’t just the hearsay I’ve always just run with in my new ventures. How entrepreneur of me. Surprisingly my own rules of thumb were quite close to the results Noam turned up. I posted the following comments on his blog in response to his post.
Noam, this is a great post. Thanks for getting this information out.
I’ve launched a number of startups over the last ten years and in the ones that we’ve been sophisticated enough to carve out the corporate structure at the very beginning our split of equity has been very similar to what you’ve mentioned here. All of these companies have been in the IT industry. I don’t know where it came from but my partners and I have always used 20% as the generally agreed upon rule of thumb and it has served us well. Although, that number has not differed based on the position that the idea person takes within the company (either intentionally or unintentionally).
In our most successful company the idea person became the CTO with his 20% equity advantage which in your research shows to be uncommon (around 6%). Although I should also mention that this person not only had the idea for the software but also wrote 100% of the code that initially took the company to market before the additional partners joined. This could be considered an investment of capital which would then bring it back in line with your findings.
I think it’s also worth considering the leverage advantage that idea entrepreneurs gain in a startup considering a 15-20% equity advantage. In your example of a common spread being 55% for the idea partner and 35% for the other partner, considering that these startups are always private companies on day one, the idea partner has full control of the company with his majority ownership because in a private company only three ownership amounts really matter (<50%, 50%, >50%). But, as with my primary company, once VC funding arrives the dilution of shareholders pushes the majority owner below 50% assuming he approves the funding round from his position of complete veto power.
This is a delicate dance in many startups and a point of contention as the partners must all be on the same page in regard to their expectations of using equity to grow the company. As a corollary when the minority ownership partner is actually building the idea brought to the venture by the majority partner I’ve seen great concern from the minority equity partner about losing his job and losing everything he’s built by being diluted out by the majority partner. Again, simply being on the same page about expectations goes a long way here.
This brings me to an idea I’ve had about matching entrepreneurs on more than just their skills and experience (which I figure they match up based on most frequently since those are more obvious) but instead on the total picture of their expectations on running a startup. If done right I think this could help more startups succeed and jump the hurdles of growth strategy alignment which I’ve seen tear so many teams apart. From my experience when the team behind the company splits the company always fails.
August 28, 2008
Since 2003 I have been following the local and national venture capital market from a distance. In the early years because of the possibility of using venture capital funding to further our growth at iContact and more recently as a source of growing capital and helping other North Carolina businesses along their paths to success. Since 2006 I have felt like venture capitalists in the Triangle area of North Carolina have been slowing down. A number of the funds that were actively pursuing technology investments 2-3 years ago seem to have gone silent.
Although my impression could just as likely be from a shift in their focus from information technology to bio-technology startups as I live entirely within the web tech startup world these days. I do know that most of these funds in North Carolina claim to have expertise in assisting both info-tech and bio-tech companies and most employ some sort of credentialed academic with a background in chemistry or biology to assist them in evaluating deals.
I read an article this evening in USA Today covering the new challenges of the venture capital industry. They mentioned the new landscape of startups that are now located all around the globe and highlighted DFJ’s strategy of putting small offices everywhere to increase their local-touch coverage. They also mentioned that the lack of venture backed IPOs in the second quarter of 2008 is further discouraging VCs and their limited partners, the people who give them money to invest.
As a few experts mention, venture capital funds are toiling with a strategy of long term growth that requires them to put more money over more time into their portfolio companies which means a few things. First, they won’t be expecting to get cash back from the proceeds of the sale of their companies quite as fast as they’ve expected in the past and second, with more money going into their companies assuming a stagnant or falling average fund size they will be forced to invest in fewer companies overall. This will of course result in them being even more stingy in their review of potential investment deals than before because they’ll expect to live with them longer and to have fewer alternatives in their overall portfolio in case things turn south.
The number of VC firms was also mentioned, with the total since the dot-com era being nearly 1,000. It’s incredible to consider the challenge that most entrepreneurs have in raising VC money considering the sheer number of opportunities available to them. Although, if you were to narrow this total number down by region and by specialty (information technology, bio-technology, clean energy technology, etc) and by the stage of company typically invested in (concept, pre-revenue, early revenue, expansion, long-term growth) I bet you would get a much more realistic picture of what we’re all up against as entrepreneurs and that is a small handful of VC funds within a two hour flight that have a clue what you’re talking about when you make your pitch. I’ll hold judgment on who’s fault that is
The also article took note of the emotional result of the challenges that VCs now face stating that “[n]ot surprisingly, venture capitalists are gloomy about the near future. ” It mentioned a survey done by University of San Francisco entrepreneurship professor Mark Cannice among VCs in the high tech corridor in California and that “[t]heir confidence last month fell to record low of 3.0 on the 5-point scale of the Silicon Venture Capitalist Confidence Index.”
With the economic uncertainly of the moment right now is a great time to get down to work building a great business behind the scenes. Looking for investment capital right now is going to be a challenge because VCs have to be very very careful where they place their bets. Build for the long term and build for the type of profitability that will allow you to fund your own growth. On the flip side, if you’re a growing company that is profitable or that has profitability in sight now may be the perfect time to raise venture capital under great terms. Firms that are traditionally more early stage investors are looking now to make investments in slightly more established companies that offer them a higher chance of survival at the cost of missing out on some tiny diamonds in the rough that might have provided them a 10X or greater return over the mid-term. As a growing, cash-flowing company focus on proving the predictability of your revenue streams and don’t lose sight of the fact that VCs need your growth in their portfolio. But also keep a version of your plan hidden in your top desk drawer that gets you through to IPO without any additional outside equity investments. If the VC market crams down any further in the next few years hunker down may be the name of the game for a while.
July 13, 2008
A post on TheFunded.com caught my attention today with the subject of Must Read Books For Entrepreneurs. It recommended the story of startup execs building their companies Founders At Work (and then adamantly disclaimed no association with the authors which I found a bit forced). The post got me thinking about business book in general.
In launching iContact in 2002-2003 while also running Preation I spent very little time reading books about entrepreneurship and growing businesses, I stayed heads-down delivering software and trying to educate the market about our offerings. It wasn’t until 2005 when I began traveling for business about twice a month that I began to force myself to read again, it had been since my childhood that I had read anything not directly related to formal education. I even had a lot of fun ridiculing two of my good friends from college when they formed a book club among their girlfriends and acquaintances.
As my need to fly coast-to-coast and to Europe increased a bit I suddenly had a great deal of time on my hands sans-broadband but wasn’t about to allow myself to sit idly. Shortly before a trip to San Francisco (typically 5 hours in the air each way over two flights connecting in Dallas) I picked up Jim Collins’ book about out-performing organizations Good to Great from a large stack prominently displayed in Barnes & Noble at nearby Southpoint Mall. This kicked off a business book reading spree and began my so far three-year streak of boring my wife to tears with the neat little anecdotes I pick up from a variety of topics: start-ups, web 2.0 technology, management strategy, performance teams, marketing, branding, organization and operations, focus, communication, and task execution.
As an entrepreneur you literally cannot find a book in the popular business categories that doesn’t apply to some part of your realm of responsibility, unfortunately you can’t read them all. Maybe there’s a book that can help you better plan which books you should read… but I guess it would be unfairly biased if it concluded that you should read it first. I think I once saw a book about how to best retain information from books that you read, I need to look for this one again, it’s certainly a challenge mentally bookmarking all of the tips you pick up along the way. Actually bookmarking them would be futile. Also, some books have one or two great ideas but spend the rest of the 200-300 pages hoping to prove the intelligence/authority of the author or the premise of those good frameworks. This is where asking around before you begin a book may save you a lot of time. Nearly every good business book today suffers this ailment, probably a symptom more of the publishing world’s expectation of the length of a paperback hit than a failing of the author to communicate properly (whether done consciously or not).
So, in hoping to pass along a road map for the juicy nuggets in two of my favorite business books I responded back with the following (revised slightly for this venue):
I suggest Crossing the Chasm by Geoffrey Moore (http://www.amazon.com/Crossing-Chasm-Geoffrey-Moore/dp/0060517123) and Good to Great by Jim Collins (http://www.jimcollins.com/). The concepts in both are useful in building strategy that the Venture Capitalists like, ie: working to focus your efforts and attack your most likely prospects.
We used the concepts in these two books to revise our view of the market slide in our funding deck and immediately saw a great response from VCs. You should at least be familiar with these books and their high level recommendations. You don’t necessarily need to read the two books, just make sure you’re familiar with the concepts as follows (you can cherry-pick the right chapters if you look carefully):
Crossing the Chasm:
The Adoption Curve
What the chasm is and how you attack it
Good to Great:
The Flywheel Metaphor
The Hedgehog Concept
The School Bus Metephor (right people on the bus, right people in the right seats, then steer the bus in the right direction)
There you go, master these concepts and you’ll have a startup MBA in the eyes of the VCs. Good luck.
July 2, 2008
CNN money recently got together a few CEOs and asked them to share stories from their time at the top of major public corporations, and then discuss their fall. The group included David Neeleman, founder of JetBlue, the airline that stranded thousands of travelers on Valentine’s day, Jim Donald, the former CEO of Starbucks, the company that explored and eventually found a ceiling to the price sensitivity and demand for premium coffee drinks, and Ed Zander, who ran Motorola as CEO.
Each have experienced a big fall from glory in the last 12 months but from their words and the situations which I remember all being covered in the media at heart I think the world understands. It’s fascinating to hear Neeleman talks about calling his wife just after being told that he was being ousted as CEO of JetBlue only to have her interrupt him to say that her mother died. The stress is unfathomable but the story seems be told almost out of the amazement of his own ability to push through the situation. Donald mentions an evening meeting at Howard Shultz’s home that was rather short in which Howard told him of the board’s decision to replace him as CEO and then telling his wife matter-of-factly that he had lost his job. He then called his mother to explain the details.
The article gives a nice look into the personal lives and support networks behind these former top executives. It’s interesting that each focus greatly on their families and spouses when discussing the happenings immediately following their dismissals. It truly is a family effort behind many top CEOs.
June 13, 2008
Ryan and I were extremely humbled to be selected as Ernst & Young’s Entrepreneurs of the Year in the Emerging category in the Carolinas region as announced last night at a black tie ceremony that we attended at the Westin in Charlotte, North Carolina. A full list of winners was posted on the E&Y website today. Nearly 500 people were in attendance including a number of entrepreneurs, sponsors, and the folks from Ernst & Young. It was quite an event including two pre-dinner receptions, formal photo portraits, video interviews, a marching band, comedy segment, and a number of creative table accessories that kept everyone entertained.
We are extremely thankful for the nomination from our friend Laney Dale of Vaco and for the support of David Hood of Ernst & Young who visited us months back to compile the details of our profile and who was able to join us for the celebration. By way of our selection Ryan and I will now attend the national event competition in Palm Springs in November.
As I’ve mentioned in post-event media interviews I’m so proud of what we’ve accomplished at iContact together. We have a world-class team that is delivering the future of web-based marketing solutions and truly empowering small businesses and entrepreneurs everywhere with a low-cost product that outperforms the competitive solutions. This comes from a team that outperforms as well.
The Emerging category finalists were all companies that call RTP home like us which was great to see. This region clearly has the people and resources required to grow many more companies like these. Finalists from some categories were much more experienced and well-known to say the least… including folks such as Matthew Szulik of RedHat and Thomas Millner of Remington Arms Company. It was flattering to just stand on the same stage as them. One was even kind enough to point out our juniority with an offer to “trade ages with us” as the group dissipated after the closing photographs.
Thanks to LocalTechWire for covering a question and answer session with Ryan and I immediately following the event.
June 6, 2008
Tonight I attended the Council for Entrepreneurial Development’s 2008 Entrepreneurial Excellence Awards in Bay 7 at the American Tobacco Campus in downtown Durham, NC along with 15 of our closest friends from iContact. We had two full tables and a few people even overflowed to join nearby groups for dinner. iContact was a headline sponsor of the event so we were able to bring a ton of people. It was great to have a great showing from our team at the dinner.
The event was as it always is, one of the best I find each year to network with business people, entrepreneurs, vendors, supporters, and friends from the Triangle who support iContact and Preation and Ryan and I personally. I mentioned to Ryan as we sat down for dinner that it was amazing how many more people among the total attendance I knew and had relationships with than just four years ago when we first began to get involved with CED and really with any people outside of the UNC community. We speculated that we could together name 50% of the people in attendance and probably had established relationships with at least half of those. There are few regions of the country that I feel are as full of people as passionate and motivated and willing to help than as in the Triangle area of North Carolina.
iContact was honored with the CED Growth Company of the Year distinction for 2008 which was truly an honor. CED’s website provides the following description of the award: “The Growth Company of the Year award is presented to an entrepreneur of a high growth company who has successfully navigated the early stage waters and had a large impact on maximizing long term value for the company. The nominee should have played a major role in the company’s success and have a large part in crafting the company’s strategic focus for the future.” It’s hard to believe that we’re being considered a Growth Company now. For five years straight we’ve been called and proudly called ourselves a startup. I guess we’ve recently grown enough to graduate to the next level. Very cool.
Ryan and I had the pleasure of accepting the award on behalf of the iContact team. Video of the award announcement is now on YouTube. In our audio presentation, that we recorded at CED in advance, Ryan and I spoke about our strategy for success, how the team has contributed (as if any of this could have been possible without an incredible team), and our unique culture that values fun. It was a nice opportunity to speak briefly about the company and hit some of the high points in front of a local crowd that’s followed our progress for many years now. It’s incredible to think that we’ve been running iContact solid for nearly five years now… although I guess it’s only been called iContact for 12 months .
June 1, 2008
Just over one year ago a good friend of mine Erik brought an idea to me about building and marketing niche trivia games over the web. The original idea was sized down to a local market prototype that would allow us to judge the demand for this type of product within a market we all knew well. The thought was that if we could make the game a success within a market that we knew well and in which we could directly build relationships with retailers and affiliates/resellers that we would have a model that we could take to other markets by way of representatives in each that had connections similar to ours in our test market.
Our local test market became UNC students and alums and the first offering became a physical boxed game with 500 questions in five categories called the Chapel Hill Trivia Game. The categories are: Student Life, Sports, History, Landmarks, and Famous People. The game became available for sale online and in many local retailers in the Chapel Hill North Carolina area in December of 2007, a little late but still in time for the holiday gift season.
We’re now fourteen months from our first conversation on the idea and six months from our first print run of the Chapel Hill Trivia Game. The company name we created to hold each of our niche trivia projects was Factrivia.
The Factrivia project has been interesting to me for a few reasons:
- A really smart guy that I respect came up with the original idea (which has been adapted some along the way).
- The long term vision involved collecting and organizing information within a social model website.
- The long term vision involved a print-on-demand process that would allow our physical printing costs to scale with demand for the product and would allow us to eliminate the need for capital and risk that comes with holding inventory.
- The opportunity matched a number of already successful business models that were addressing the long tails of other traditional markets.
- Preation had software that would make building a content-managed website and e-commerce system to support our test market prototype quick and cost effective.
- Our test market prototype plan would involve getting to know the consumer game market and learning about retail distribution models which were completely out of my realm of experience.
- We had a good balance among the four founders between those with time, connections, and business and technology experience.
After spending just over a year learning in this market and testing the demand for our local market prototype the Chapel Hill Trivia Game I feel like I’ve learned a lot. I’ll outline a few of the things we’ve done that have worked and others that haven’t from both a tactical and strategic standpoint below.
Things that have worked:
- Our website and e-commerce system (Preation) have performed perfectly
- Our email and document management system (GMail and Google Docs) has worked really well
- Our conference call line (FreeConference.com) is perfect for what we need
- Semi-weekly status meetings with emailed to-do lists for each person following the meetings
- Our printing and game production company (Delano) did a nice job on the games
- Coordinating communications and priorities among team members in different locations
- Manually researching, documenting sources for, and editing 500 trivia questions on a niche topic
- Breaking our go-to-market strategy into smaller chunks that would allow us to prove demand for what we’re doing at each step along the way and thus minimize risk
- Funding our demand evaluation process with founder and friend-and-family funds
- Negotiating great placements of the game in retail establishments that sell to our market
- Selling to customers through Chapel Hill retailers and bars and restaurants
- Selling through organizational affiliates who have active members
- Using local media coverage to drive website sales
- Using our status as UNC alums to tell a good story about the creation of the game
Things that haven’t worked (hopefully just yet):
- Highly targeted advertising to UNC alums and students through web flyers on Facebook
- Web banner advertising on DailyTarHeel.com
- Non-holiday-motivated selling directly to consumers from our website
- Affiliate selling through alumni organizations and groups around the country
Factrivia has been a fun project and I’ve already learned a lot. We’ve sold nearly half of our test inventory so far and we’ve got a lot of hard work ahead of us. Our Tuesday and Thursday meetings are now all about revising and refining our current sales and distribution strategies and working to find channels that move the product quickly. So far so good.