Raising Capital and Launching Startups in Uncertain Times

This is part of my Series on Venture Capital.

A few weeks ago I authored a post describing five common myths about raising capital. In this webinar organized by the National Council for Entrepreneurial Tech Transfer, I am joined by colleagues of mine from the venture, angel and legal community to specifically address the challenges of raising capital and launching new companies in a difficult economic environment. The webinar's agenda also includes the following specific sub-topics:

• How recent market developments are affecting tech transfer offices and startups.
• Emerging trends in the angel investment market.
• Emerging trends in the venture investment market.
• Changes in legal terms of startup transactions.
• Positioning startups for funding and operational success.

In my remarks I specifically address how the economic downturn has affected university start-ups/spin-offs and what steps university venture labs can take in light of such conditions.  I welcome your insights as always.

Raising Capital: How Would You Pitch Your Business to an Old Friend?

This is part of my Series' on Angel Investing and Venture Capital.

I came across this short post from London-based VC Nic Brisbourne yesterday and it immediately struck a chord with me.  Essentially he recommends that entrepreneurs pitching to investors should communicate as if they were pitching to their best friend. In my opinion this is a simple yet very effective prescription and encapsulates in one fell swoop all the right things one should do in a pitch.

Remember, investors are first and foremost looking to back great entrepreneurs who know how to communicate well with colleagues, employees and customers.  When you convey your ideas in a straightforward and unaffected manner, are responsive to feedback, and as Nic says, “do as much listening as talking”, you’re really putting your best foot forward.  

Would love to hear your thoughts on this.

For the next post in this Series, click here.

Notable Posts: "Read All About It"

 

London VC, "Does Operational Experience Help a VC?"

In VC deals, Price Doesn't Matter - But The "Promote" Does

WSJ on Andreesen

Don’t Raise Money: China StartupBlog

University Spinoffs: Bridging the Cultural Divide

This is part of my Series on University Entrepreneurship.

 A big factor in having success spinning-out university startups is the ability to bridge the cultural gap between academia and the investment community.  I think about this divide a great deal, both as a long-time investor in this space and perhaps even moreso now that I am the director of a prominent university venture lab which spins out 10-12 new companies a year.

I was therefore delighted to recently come across this short post written by Amit Monga, Professor of Finance at the University of Alberta. He shares some excellent insights into the practice of investing in university startups courtesy of his prior experience as a venture capitalist.  Dr. Monga’s central premise is that investors want to see much more than technology when they speak with a university tech transfer office.  They are, after all, in the business of launching new companies, which require quite a bit more to succeed than the initial invention or discovery.

What really caught my eye, however, is his very first point which addresses the cultural divide to which I refer above. He points out that whereas it’s very much the custom in academia to focus on a professor’s achievements in research, (including his or her credentials, awards, honors, the number of grad students in their lab, etc.), the reality is that investors first want to hear a value proposition articulated for a potential business. Monga asserts that investors must actually have the answer to this question within the first five minutes of a pitch.

Having politely sat through quite a number of such lengthy introductions that never quite arrive at describing the “pain in the market”, I must wholeheartedly agree with Dr. Monga. In fact, I would say that this value proposition should be expressed within the first two minutes of a pitch.  If the investor is interested, there will be plenty of time to learn more about the professor’s academic achievements. 

I’ll go a step further on the subject of the cultural divide and say that I’ve seen instances where an investor’s motives are viewed extremely dimly by the academic. This too can be a problem.  Again, in this instance, it’s incumbent on the tech transfer folks to invite only the most reputable people into the university and to help work through any ingrained biases that might exist on either side.  For an eventual start-up to be successful, both parties will have to get along extremely well and will come to rely on each other. Start-ups are the very opposite of “arms-length” transactions.

So whether you’re an angel investor, a VC, an entrepreneur, a grad student, a post-doc or a university professor, it’s always valuable to approach university spin-offs with a great deal of cultural sensitivity and understanding.  I assure you, this sort of awareness alone can make all the difference.

For Part Ten in this Series, click here

My Interview on Venture Hype

This is part of my Series on Angel Investing. A few weeks ago I was interviewed by the great team at Venture Hype, a popular web-portal dealing with all aspects of angel investing. The interview was posted earlier today and can be found here. We begin by discussing my background and how I became immersed in the world of entrepreneurship and early-stage investing. We then go on to cover various aspects of academic entrepreneurship and university spin-offs, what works and what doesn't work, and what investing in this space is all about. Lastly, we touch on angel investing more generally. As always, I welcome your input and questions.

 For the next post in this Series, click here.

Mourning Angels: What Went Wrong With Your Investment? (Case Study #1)

This is part of my Series on Angel Investing.

Some readers of this blog who are interested in getting involved in angel investing recently suggested I do some case-studies as part of this series. I agreed and thought we ought to start by examining some typically negative scenarios that one inevitably confronts as an angel. Hopefully these case studies will stimulate some questions and further discussion from which we all can learn.

Eventually we'll work our way back to the core issue at hand: your own judgment of other people’s capacity. (See my earlier posts on this topic here and here).

(**Disclaimer: These case studies are not modeled after any person or any company in particular- they are designed for illustrative purposes only).

CASE STUDY ONE:

So you hear rave reviews about this guy long before you meet him. The people raving about him are actually some customers of his whom you’ve known for years and respect and who have successful businesses of their own that have benefited greatly from his product. You meet him. He needs some growth capital. He’s an industry veteran, a go-getter, knows the business inside and out, knows how to stretch a dollar and generally checks out at first glance. You and your small band of angels analyze the business and perform your supposed due diligence.  Things look good actually and he’s in talks with a potential acquirer. After a month of analysis and discussion, the investment gets made. 

In the beginning all seems fine. There is some initial growth, some promising leads, but after about 18 months you all realize that nothing is happening. There is no growth and the acquisition talks have broken down long ago. There is also very little communication lately.  You hear that he’s borrowed some money recently and is having trouble paying it back. You fly out to visit him. He’s friendly, but seems evasive, a little down.  He’s gained about 15 pounds since you last saw him. Now what?

QUICK ANALYSIS:

He may have got caught up in other things. He may be having marital problems. He may have made some personal investments in other areas when the going was good but then the market tanked. Remember- as an Angel, you are probably not on the Board and you are a minority shareholder.

             Q: So what are your options?

             A: Welcome to Angel Investing. You have none.

Questions for Discussion:

• So what could you have done differently? Would a convertible note have helped rather than a traditional equity investment?

• Did you really know this person? Did you make reference calls?

• During diligence did you ever meet his family, see his home, see how he lives, what his hobbies are, etc.?

• What does due diligence mean to you?
  

Let's discuss this case study and the questions I've raised.  Looking forward to your thoughts and comments.

For the next post in this Series, click here.

Deal Terms for University Spin-Offs

This is part of my Series on University Entrepreneurship.

 Everyone asks about deal terms at some point, so we may as well address it sooner than later. Let’s say you’ve now visited a few tech transfer offices and you are ready to talk to their New Ventures person about spinning out some IP into a start-up.  What kind of deal terms should you be looking for?

The reality is that every deal is different and so it’s difficult to generate a one-size-fits-all response. Also be mindful that university tech transfer offices across the country vary greatly in their approach to start-ups.

Here are some very general guidelines to a fair deal that you may find helpful, however:

• In most cases you should obtain an exclusive license to the technology in the fields in which you intend to operate

• In most cases you should seek to back-end the economics of the deal and stay away from high up-front license fees

• You should be prepared to partner with the university and let it have an equity stake in the company. (We will have a separate series of posts on equity considerations as there are many nuances here).

• You should mutually agree to some diligence milestones that lay-out time-lines for things like first product sale and in some cases capital-raised or revenue targets. These should have built-in flexibility and not be harsh

• Royalties depend a great deal on the industry in which you’ll be operating but should never be a yoke around your neck- allowing you to operate with a comfortable margin

If you’re not getting a deal done that reflects a win-win you should quickly move on, but such negative outcomes are less and less frequent. More and more offices understand the challenges of launching a start-up and, when a talented entrepreneur is at the table, increasingly have the right approach.

For Part Nine in this Series, click here

Golfing-in-Exile (2): Getting it off the Tee

This is part of my Series on Golfing-in-Exile.

We’ll get deeper into this in subsequent posts, but here are some initial tips for the GIE who plays twice a year and suddenly finds himself in some version of the following. (Tell me you haven’t been a part of this classic situation!):                       

So your friends show up to the course late, they’re still yapping on their iphones about liquidation preferences and getting rid of the CEO and of course, no one could hit balls before the round started.  You’re as tight as a board and haven’t stretched in 15 months. You’ve just seen the people at the clubhouse ring up your card for a $130 greens fee and you had to buy a pair of golf shoes with soft spikes on sale for $110 because the last time you played, hard spikes were still allowed and no one told you this had changed.  You bought a dozen Titleists (most of which you will lose during the coming round) for another $50 and before hitting a shot you’re out about $300.

You step up on the tee, address your ball and VC #1 is still in the cart getting angry at someone he’s talking to on the phone.  Your other hyperactive entrepreneur friend is moving all over the place and clearly visible in your peripheral vision. He almost hit you with one of his practice swings a few minutes ago. VC #2 is wolfing down a sandwich and potato chips not five feet away from you. Since you’re on the East Coast and it’s April, it’s still freezing and you have no “cold weather” gear because again- you hardly ever play golf.

Reality: if you don’t have my “Golfing-in-Exile Rules” memorized- you have a 1% chance of hitting the ball in the fairway.

Here’s what you need to do off the tee: (GIE RULES OFF THE TEE)

• Keep some movement in your body before you initiate the swing. Don’t just stand there like a statue and think you’ll suddenly uncork a 300 yard drive. Move a little, get some rhythm, swagger, etc. going- feel the legs and arms and waggle the club some. A golf swing is actually an athletic movement- so holding perfectly still at address will not help you accomplish this despite what you may think.

• Kick your right knee, (if you are a righty), slightly left toward the target at address, keeping it cocked throughout the swing. This will keep you centered and over the ball with a controlled swing.

• Take a smooth and deliberate backswing. Most disastrous shots (mine included) are born of the warp-speed at which people’s backswings travel, which consequently throws the whole body out of whack.

Ok- so you got it off the tee- it wasn’t great- but you’re out there and not speeding off in your cart cursing to yourself as you hurtle towards your horrific annual round.  VC friend #1 is having a fake heart-to-heart with a CEO he is “letting go” next to you. You can tell he really wants to assassinate the guy for costing him so much money. He sliced his ball into some thick bushes and obviously needs an aspirin.

 Now what? We’ll discuss in the next GIE post.

For Part 3 of this Series, click here.