After a few weeks of email discussions and meetings lead by CED a local group of entrepreneurs and investors have thrown their support behind LaunchBox Digital and Triangle Startup Factory, two RTP based startup company incubators who will join forces under the LaunchBox Digital brand. I’m really excited to see the incubator model coming to the Triangle and starting with an established brand name with LaunchBox means that some of the early ground work has already been done. For instance, upon the graduation of recent LaunchBox Digital classes TechCrunch has provided good coverage and exposure for the graduating companies and their products/services. The announcement of LaunchBox starting up in RTP is no exception. I look forward to being involved either as a spectator, adviser, or mentor to the startups and the incubators as they work together to create the next great companies in this part of the country.
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:
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.
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.
The Kauffman Foundation in Kansas City just published the results of a research project led by North Carolina entrepreneur and Duke Professor Vivek Wadhwa. The results include a comparison of the success of startups (opened between 1995 and 2005) by the level of education achieved by their founders. I would assume the founders in most cases completed the mentioned level of education before launching the startups although I’m sure a few crazies 🙂 did both at the same time for a while.
I’m fascinated to see that even in the risky and dynamic world of startups the correlation between education and success (as measured by annual revenue and a count of workers employed) is strong. Startups founded by alums with higher degrees and from Ivy-League universities had an average of $4.5 million in revenue more and 37 employees more than founders with high school degrees. In the middle were four year degree founders from a wide variety of universities, like myself from UNC. Also very important to me was the fact that 45% of founders started their companies in the same state where they received their education, as I have now done several times.
- the level of education of founders to the success of their startups (in terms of revenue generated and workers employed)
- nearly half of startups open in the state that their founders received their education
Both of these are great explanations for why the Triangle of North Carolina has so many entrepreneurs and a high number of success stories. I wonder though if the level of education (or more importantly the pedigree of the university) is simply a driver of access to other successful people and opportunities and thus the cause of the effect more than the value gained from the additional learning. I’m sure a lot of people would argue otherwise. But, the fact that a state’s investment in public universities comes back in job creation from 45% of the startups founded by its graduates on average is truly inspiring.
Kudos to the Kauffman Foundation for completing this research and for their support of UNC and other entrepreneurial universities across the nation. More information on the Kauffman study is available on the Kauffman website.