Raising Capital (8): Eyes Wide Shut... Welcome to the Masked Ball

(click on photo for the video of this scene)

This is part of my Series' on Venture Capital and Entrepreneurial Culture.

Over the years it’s been real privilege for me to mentor friends and acquaintances of mine who at one point or another in their careers have decided to make the leap into the start-up game.  I happened to have had the particular advantage of starting early and so carry with me the proverbial scars on my back and psychic black-and-blue marks so reminiscent of the trade.  It’s these same lumps that I always hope to help first-time entrepreneurs avoid.

Perhaps the most valuable counsel I can ever give to someone occurs right around the time they begin to raise capital to fund their company. This may well be the most vulnerable point of all in the life-cycle of a start-up for many reasons. One wrong move can literally mean the difference between success and a world of pain. Here’s truly where lack of experience, even in the smartest of people, can mean sheer disaster. I’ll start with the most important rule of all:  

You need to know who you are dealing with.

Through no fault of their own, first time entrepreneurs fresh out of school, an academic lab or who have worked for years at big companies generally have no concept of the cast of characters that populate the early-stage ecosystem. If you have just emerged from this sort of cocoon, you no longer enjoy the invisible “protection” your old position or firm’s name provided and hardly realize how vulnerable you are.  Essentially, you’ve arrived at a sort of Masked Ball, eyes wide shut, with no concept of who is around you.

Inevitably you will run into certain masked characters that may appear in any number of guises. Their firm might have the words “Capital” or  “Ventures” in it, or they may say that they are part of a “group of investors”, and they will talk about the many startup companies they have “worked with”. Certainly they will discuss how much they would like to help you with your funding needs. But beware…

You may be in the midst of being initiated into the shadowy world of the “broker-dealer”, the “investment banker”, the “middle-man”. At some point you may well discover that he has no money to invest in your company whatsoever. Instead, he will want to “help you” raise capital for a fee, taking a percentage of the money raised for himself and perhaps a retainer and warrants to boot. It’s perfectly legal and I will say that there are indeed some reputable people operating in this business. But these are few and far between.

Jason Calcanis and Fred Wilson have recently published some posts, (here and here), describing yet another masked character on the scene- namely, the type of angel group that charges extremely hefty fees, (thousands of dollars), to entrepreneurs who wish to pitch them.  This is definitely a character to avoid.  Another type that needs to be vetted carefully is the one who tells you he's got a bunch of shell companies on the bulletin board stock exchanges and that with a flourish of his cape he can take your company public with a reverse merger. Warning bells should go off immediately.

The bottom line is that although there are some notable exceptions, most of these masked characters generally do not have your best interest in mind and I have both witnessed and been told of dozens of situations where unwitting entrepreneurs have been victimized by them. My advice is simple. If you are trying to raise capital for your start-up, ask around first, do your homework and talk to half a dozen or more entrepreneurs with funded startups about their experiences. Also, try to find a good mentor while you’re at it. In every community there are reputable angel investors, legitimate angel groups and of course a handful of early-stage venture firms that have money to invest if they like what they see.

Notable News: "Read All About It"

1) Silicon Alley Insider "Working Hard is Overrated"

2) VentureHype "Ready to Become an Angel Investor?"

3) WSJ "Where Twitter Ranks in Venture Funding History"

4) VentureBeat "Green Investing Bounces Back From Recession"

5) Larry Cheng "Who is the Venture Capitalist's Customer?"

Notable News: "Read All About It"

1) WSJ "America's CTO Challenges Tech Sector"

2) NYTimes "Twitter Confirms New Funding"

3) D. Shah "12 Facts About Entrepreneurs That May Surprise You"

4) This Is Going To Be Big "Retraining Wall Street"

5) Scott Anthony "My Best Innovation Advice? Be Promiscuous"

Breaking the Century Mark: Celebrating 100 University Spinoffs at Columbia University

This is part of my Series on University Entrepreneurship.

 Upon spinning-off 13 companies from Columbia University in FY 2009, we at the Venture Lab realized that we’d now eclipsed the century mark with over 100 spinoff companies historically. We were also heartened by the fact that over 30 of these had been venture-backed at some point in their life-cycle, over 20 had either been sold or gone public and among them they had created in excess of 1500 jobs and raised over $1 Billion in venture capital.

It’s a testament to all the great work being carried out by the faculty and grad students in the 7,000 plus labs at the University, by the business school’s entrepreneurship center and by the talented entrepreneurs and investors who stepped up to take fledgling ideas and transform them into commercial ventures.

It’s also just a snapshot of the emerging behemoth of university entrepreneurship being loosed upon campuses around the country. 

(Above find just a few of Columbia University’s portfolio companies)

For Part Sixteen in in this Series, click here

The “X” Factor in Business

 

This is part of my Series on Entrepreneurial Culture.

Much as it has with most other sectors, the economic downturn has taken its toll on the early-stage ecosystem.  Many angels have curled up into fetal position for a while, a good number of VC funds are simply running on fumes and lots of startups are having a difficult time getting traction and are consequently running out of operating capital. By necessity people keep up appearances but plenty of old hands out there know what the deal is. There’s no getting around it- it’s just been tough.

I won't descend into cliché by expounding upon the inevitable “silver-lining” or the “positives” in all this. I will simply say that I have observed that a by-product of these trying times has been a sense of clarity imposing itself almost everywhere. Everything has become very basic in that so many early-stage companies are simply fighting to survive and to get through all this. Entrepreneurs are in hard-core bootstrap mode, the universities and the city are pitching-in trying to do their part, and the local entrepreneurship communities are congregating and banding together like they never have before. There’s something absolutely special going on in this city and I’ve been heartened by it. In my work as an entrepreneur in the university space and as an angel I have the privilege of meeting and working with dozens of entrepreneurial teams each year and the camaraderie and enthusiasm so many of them possess in the face of all this is inspiring.

There’s something else that has been reinforced to me in all this. It’s what I call the “X Factor” in business. When someone in a university lab for example, makes a shocking scientific breakthrough in an area with a large commercial market- it is as if there were never such a thing as a recession. The sun suddenly emerges in full force and the dark skies are a distant memory. Investors and entrepreneurs get on planes, trains and automobiles from near and far and converge in full force- money is suddenly plentiful, the absence of a management team is a mere detail and the future is unlimited. The somber story-line I’ve painted in the paragraphs above (and that the media repeats ad-nauseum) is suddenly rendered meaningless.  When Vinod Khosla decides to raise a couple of new clean tech funds, again, the mainstream narrative is eviscerated and he raises over one billion dollars with a wave of his hand. Similarly, when the likes of an Andreessen feels it’s his turn, a cool $300 million plus materializes for his new fund.

My message in all this? Simply that nothing is as it seems. That the “new story” can be written at any time, by anyone, regardless of the conventional mainstream narrative or the state of the economy. If you’ve got a me-too company or an incremental improvement on a product that already exists, or if you’re not fully committed to the venture- well, it’s a safe bet that convention will apply. But if you’ve got something magnificent, something bold and clever and possibly disruptive, well then… you may yourself be that “X-Factor” and if so, anything is possible.

For Part Fourteen in in this Series, click here

5 Steps to Take If You Cannot Raise Any Capital for Your Startup

This is part of my Series on Venture Capital.

In a recent webinar I addressed the topic of raising capital and launching startups during an economic downturn. Previously, I published this post dispelling certain myths about raising capital. One matter I did not address in either of these, however, is perhaps the starkest reality entrepreneurs must face in times such as these. It is the reality that very few newly launched startups will actually be able to raise any seed capital whatsoever.

Until significant traction is achieved in a new venture, funding from angels or VC’s alike is simply more of a scarcity than it normally is. Now is truly a time for friends and family money, but this too is difficult to come by for many these days.

So if you find yourself in such a situation and yet are determined to launch your startup, what should you do? Here are some steps you can take:

1) First forget about paying rent. Find a free cubicle at a friend’s office, work out of a lounge or your home, or try to get accepted into a local incubator program.

2) Employees? Forget it. Hire some unpaid interns, give a talented developer some equity with a vesting schedule based on milestones and make do for now.

3) As for basic startup needs such as conference calling, file exchange services, online databases, blogging tools, analytics, bandwidth, etc., most of these services can be obtained for free and/or on the cheap.  Just check out services such as google docs, amazon web services, drop.io, freeconferencecall, dabble, crazyegg and many others.

4) Lawyers? Forget it. Usually there is no need for a lawyer at this point. Instead, find an experienced mentor and read my post about this topic here.

5) Everything else? Do it all yourself but constantly attend local entrepreneurship events and mix with fellow bootstrappers for moral support so as to constantly exchange information and ideas. Put yourself out there, get "in-the-know", help others and you will find that people will want to help you as well.

If you think this is tough, you’re absolutely right- so read about Bill Powell building an entire golf course from scratch or about Jeff Bezos’ earliest days at Amazon for inspiration.

The bottom line is this: It's all on you right now. Welcome this challenge, be incredibly resourceful and make it happen.

Profiles in Entrepreneurial Courage: The Story of Bill Powell

This is part of my Series on Entrepreneurial Culture.

I was really inspired by an article I read in this weekend’s NY Times penned by Larry Dorman.  It’s about a gentleman by the name of Bill Powell, a veteran of WWII, a great-grandson of Alabama slaves, and a man who endured enormous indignities and discrimination but nonetheless persevered in achieving his entrepreneurial dream. His particular ambition was to design, build and run his own golf course.

Upon his return from the war no bank deigned to give him a loan and he was essentially denied the rights accorded to him in the G.I. Bill.  Unbowed, he managed to scrape together some seed money for his venture, borrowing from his own brother and from two black physicians. He then proceeded to handle the rest on his own and slowly and steadily built a golf course from scratch. He finished with the front nine in 1948. After earning the means to buy some more land, he completed the back nine thirty years later- in 1978.

Today his Clearview Golf Club of East Canton, Ohio is on the National Register of Historic Places and Mr. Powell, who is now 92 years old, will shortly be receiving the PGA’s Distinguished Service Award.

I write quite a lot about entrepreneurship and entrepreneurial culture and you can find my various posts on this subject here. These two passages below, however, said it all to me and embody somehow what being an entrepreneur is all about:

“He did much of the heavy work himself, clearing brush, pulling out fence posts and hauling away stones in a wheelbarrow. He seeded the fairways by hand, sometimes helped by Marcella, who died in June 1996 after 56 years of marriage.”

“He and my mother planted most of the trees you see there bordering the first hole,” she [his daughter] said. “When you think about what he was able to accomplish here, with everything that was arrayed against him, it really is quite amazing.”

For Part 6 of this Series, click here.

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• After Battling Racism, Veteran Found Peace on His Golf Course (nytimes.com)

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.

Launching Your Company: Send Lawyers, Guns and Money? Or Do It Yourself!

This is part of my Series on Entrepreneurial Culture.

The classic Warren Zevon refrain, “Send Lawyers, Guns and Money”, could very wellepitomize the attitude many first-time entrepreneurs take on when launching their companies.  In fact, I’m asked the question, “Which lawyer should I hire?” so often that I decided to share my quick thoughts on this matter.

In my opinion you actually do not need a lawyer. What you really need is a successful serial entrepreneur to be your mentor. She or he can help you not only with incorporation but with all the other issues you’ll be facing as you launch the new company.

In a nutshell- hold your fire and save your money.

Nowadays it’s a breeze to incorporate online and there are services such as Legal Zoom and others that remove any need whatsoever for engaging counsel.  Furthermore, standard Operating Agreements are widely available and figuring out whether to start an LLC, an S Corp or a C Corp or what state is best suited for your newco basically involves a two minute conversation with your mentor.  To pay a lawyer a handsome retainer and hourly fees to help you with any of these issues is a complete waste of money in my opinion.

If you don’t have an experienced mentor to help you and absolutely insist on hiring a lawyer, please remember that these services are a commodity. You should only work with reputable, respected lawyers that primarily work with start-up companies and who are well-regarded in your local entrepreneurial and investment community. If you go elsewhere you will most likely be shelling out thousands of dollars for the usual rigmarole. Reputable counsel will help you set things up inexpensively and will be a resource that is available to you as you grow your company.  Their value will manifest itself once you actually have a revenue-generating business and are perhaps raising your first round of institutional funding. 

I of course welcome you to share your thoughts and experiences on this topic.

Google Translate is Awesome

I recently found out that some folks in Asia have been using Google Translate to read my blog in their language. What a remarkable tool this is. Seeing a screen shot like the one below which translates my blog post on the five myths of raising capital into what seems like Japanese is also quite humbling.

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

Five Qualities of Great Entrepreneurs

This is part of my Series on Entrepreneurial Culture.

I mentioned in an earlier post  that I’d eventually share my thoughts about what qualities I think make certain entrepreneurs more successful than others. For me, this isn’t just idle philosophizing. When I invest in companies as an angel, or when I entrust a university spin-off to the hands of an entrepreneur, character judgment has concrete, real world consequences.

Over the years I’ve picked-up on a few key qualities that most successful entrepreneurs possess.  Below are the five such qualities I’ve identified. Keep in mind that these qualities are interrelated.

Extreme Focus & Big Energy: 

Laid-back people, folks who are easily distracted and/or disorganized do not make good entrepreneurs. Those I’ve met who drive businesses to great achievement all possess a single-minded relentlessness and intensity. At times this dedication and energy can border on what mainstream society considers “unhealthy”, but I think this trait is probably required, for better or for worse.

Ability to Do What It Takes and Multi-Task: 

Have you met folks who mention in an off-hand way that “I don’t answer emails at night or on weekends”? Or have you met folks who tell you that “people exhaust me”. How about this one: “I’m good when you give me one thing to do but don’t send me a bunch of stuff at once”. They may be wonderful people, but rest assured, they are not destined to be successful entrepreneurs. Entrepreneurs who excel always do “what it takes” and always make the extra effort.  They can handle multiple tasks on a given day often in an atmosphere of great uncertainty. Perhaps most importantly they can deal with all sorts of personality types and don’t spend psychic energy complaining about how much they dislike so-and-so.

Self-Confidence and Flexibility:

Launching oneself into the realm of the unknown takes a great deal of self-confidence. It presumes that such a person feels he or she is equipped to successfully deal with whatever is thrown their way. New ventures are all about being prepared to address the unexpected obstacles and bad news with which you will inevitably be confronted. Generals say that the battle plan lasts as long as the first engagement with the enemy occurs. Mike Tyson famously said that his opponents’ strategy coming into the ring with him lasted up to point when they first received his fist smashing into their faces. The same is true for start-ups. It’s a game for confident people who can deal with reality. They have to be confident and flexible enough to change their plans and adjust their expectations based on the feedback their business receives where the rubber meets the road.

Communication Skills:

This particular skill is not necessarily required depending on the type of business you have. In the world of consumer internet companies, for example, there are plenty of ultra socially awkward entrepreneurs like Markus Frind (Plenty of Fish) and Tony Hsieh (Zappos) who are well known for their shy and retiring demeanor. However, in the case of both of these gentlemen, it would be hard to find other human beings on this earth who are more driven than they are. (Here’s Markus describing his own killer-instincts and relentnessness: http://bit.ly/4AZDu)

In businesses that require interacting with other human beings in the non-virtual environment, however, I do believe that strong communication skills are a pre-requisite for being a good leader. You need to convince talented people to work with you and you need customers and investors to want to do business with you. Articulate, clear-minded people have a huge advantage over other entrepreneurs who lack these skills.

Enlightened Stubborness:

This is perhaps the most elusive one of all. On one hand I actually do think great entrepreneurs are stubborn. They are stubborn in the sense that when they first struck out on their own they faced down all the people who doubted them and told them not to do it and not to stray from the primrose path of job security. They are stubborn in the sense that when certain people or certain old ways of doing things get in the way of their innovative businesses, they persist and overcome this resistance. And they are stubborn to the core when customers first tell them “No” and when competitors come after them with a vengeance.

So where’s the enlightened part? Well, although I have not actually met someone with this quality in the real world, I believe that the ideal entrepreneur would have an almost preternatural self-awareness lurking inside them amidst all this primitive stubborness. For example, they would have a sixth sense about when things just aren’t working and are flexible and confident enough to change plans. They would seem to know just when they’ve reached the point at which they’ve built the business up to the highest level they were capable of and are suddenly willing to step-aside for a manager with the right management skills to help take the company to the next level. Lastly, they would have the capacity to really listen to respected advisors and to take advice without bristling.

The reality is that no one person has all five of these qualities in abundance. And if they do, they’d probably have a bunch of other foibles that would diminish the effectiveness of the ones I’ve mentioned above.  Integrity, for example, is of paramount importance and the absence of it has been the Achilles heel for a lot of talented entrepreneurs.  My points above should thus be taken for what they are- a general guide born of my own experience and not some kind of definitive checklist.  Ultimately we all use our own judgment about the entrepreneurs with whom we partner or in whom we invest.

For my video conversations with great entrepreneurs: Venture Studio

For my ongoing Series on Entrepreneurial Culture: Entrepreneurial Culture

How America’s New CTO Can Help Launch Game-Changing University Spin-Offs

This is part of my Series on Entrepreneurial Culture.

I was introduced to America’s new CTO, Aneesh Chopra, a few years ago after a rousing speech he gave in Washington DC. Back then he was Virginia’s Secretary of Technology and I clearly remember being impressed by what a great a speaker he was and just how different he was from the typical government policy wonk we’ve all heard talking in broad strokes about the importance of technology, job-creation and the like. As he was finishing his speech people actually got up off their seats and started applauding. He had the whole place buzzing.

This was obviously a guy with great intellect who was talking specifics and who brought a tremendous understanding of the tech landscape to the table. Tim O’Reilly actually wrote the definitive post (http://radar.oreilly.com/2009/04/aneesh-chopra-great-federal-cto.html ) about Chopra back in April and it is well worth reading as it outlines his qualifications, his vision and the many initiatives he brought to fruition in Virginia. This is someone who actually gets things done!

I’m bringing Chopra up because he was recently interviewed by the New York Times http://bit.ly/PIPwJ  and specifically mentioned what he’d like to see change within University Technology Transfer:

“Mr. Chopra noted that among universities, there is a wide range in how effective they are in commercializing the work of their laboratories. He wants to take the practices used by the most commercial of universities and spread them to other research facilities.”  He also stated that “…. rather than purely thinking about basic research…. the government should focus on investing in technologies that can be developed. A first step is to find ways to actually measure how much research is being commercialized.”

These statements were quite stunning to me actually. First of all, a prominent government official was unequivocally stating that some universities are doing a better job commercializing IP than others.  Second, in terms of that age-old policy debate  that pits the funding of pure basic research against the funding of commercializable technologies, Chopra feels that government must also fully embrace the latter. This is refreshingly plain talk from a senior political appointee.  

So how do we make this happen? I believe that the best way for the government to help commercialize the country’s most promising university technologies would be through the creation of a special fast-track program.  This program would selectively provide proof-of-concept funding for breakthrough university technologies suited for a spin-off. Bridging this “gap phase” or “valley of death” as it is called in the industry, is the most formidable challenge we are faced with in the world of university spin-offs.  This money would thus be used to fund the vital proof-of-principle work that really needs to get done before talented investors/entrepreneurs can be incentivized to spin-off companies from the academy. I am specifically talking about funds for beta versions of software, prototypes for medical devices and animal studies for drug discovery projects.

Obviously these emerging spin-offs would have to address the innovation mission of the Administration http://www.whitehouse.gov/issues/technology/ : Modernized infrastructure: broadband, health care information tech, electrical grid & cyber-security.

The other crucial feature of this Program would be to assemble a world-class Selection Board comprised of successful entrepreneurs and/or investors with domain expertise in the relevant disciplines. This Board would not only select the country’s best spin-off opportunities but could also help recruit the right management for them.

Hopefully I'll be able to get this message to Aneesh because I truly believe it could lead to the emergence of game-changing university spin-off companies that could have a role in helping us transform this economy.

The Three Most Common White Lies I’ve Heard Told to VC’s

 

This is part of my Series on Venture Capital.

I see a lot of amazing things happen when investors and entrepreneurs interact. I’ve witnessed and been a part of many Venus-Mars moments, the rare love-fest and then of course, what I call the annual train wreck. Today I’ve chosen three questions that may come your way that you ought to understand when you’re out raising capital. I chose these specific questions from the multitude only because I’ve cringed at the responses I’ve heard so many times.

Q: So, how much money have you raised or invested in this company?

This question is actually the least loaded of the three I’ve chosen. It’s very straightforward. On three separate occasions this year, however, I’ve heard the entrepreneur, (who in each case had raised zero money), throw out a number in response that roughly corresponded to the non-dilutive grant money the company had received in the past, prior to his involvement. At least once this number was in excess of one million dollars and gave the impression of a large seed round of some kind. Whereas these responses were technically not outright falsehoods, I knew in each case that there was an intent to ‘slip this one by’.

One thing to keep in mind here is that the investor really wanted to know two things: 1: Have you put any of your own money into this company? And 2: Has anyone else put actual money into this company as an equity investment? If the company, (or the lab technology pre-company for that matter), received grant money in the past that is wonderful- but be specific about it. You are building a relationship with a potential partner after all. First of all it’s the right thing to do. Also, the investor will certainly find out eventually when he or she sees the cap table. So be clear and honest in all your answers. An example of an acceptable answer might be: “The company received some non-dilutive grant money from Gov’t Program Z one year ago, but no, we have no equity investors as of yet”.

Q: I see, so who else in the investment community are you speaking with?

Ok, so this is a rather loaded question. Some entrepreneurs greatly resent it and perhaps with good reason. They know full well that the VC will be calling any fund they volunteered by name soon after they depart the building. Georges van Hoegaerden of the Venture Company (www.venturecompany.com)  is particularly critical of this question and others like it and feels that it is an indicator of what he colorfully terms a “sub-prime VC” and the lemming mentality he so detests. http://venturecompany.com/opinions/files/detect_subprime_vc.html

But let’s put these macro issues aside for the moment. Let’s face it- when you ask someone to invest in your company, you have implicitly submitted yourself to entertaining questions of all kinds, (no matter how inappropriate). So how should one answer such a question? Well, here’s some practical advice. Don’t hem and haw and don’t start out on some long-winded, rambling and evasive story. Be prepared for how you want to answer this question. If you decide ahead of time that you won’t answer this, prepare an elegant response. For example, you could say something like “I’m talking to a number of funds but am really looking for the right partner who believes in this team and this vision”. If you’re willing to answer, do so and mention the funds with whom you’ve spoken. How you choose to respond is largely a matter of taste and personality I think, but the key is to have conviction, prepare and be forthright. Never hem and haw and never equivocate.

Q: Got it, so this is really interesting. What’s the valuation of the company?

Wow. This is the one question I’ve seen people botch from the most real-deal traditional conference-room pitch to the most academic ivory-tower business school venture competitions I’ve moderated or judged. I’ve seen the deer-in-the-headlight look take hold. I’ve seen presenters repeat the question in a near catatonic state…. “the valuation, the valuation…. well….”. I’ve seen the most confident and polished presenters suddenly look over helplessly to their partner for help.  Most often, however, people dissemble, equivocate, punt, smile nervously or giggle out loud in a strange and guilty manner as if their bluff has been called and the unforeseen moment of truth has arrived. I’ll leave the “Why” in all this to trained shrinks although I personally believe it is because presenters simply are not prepared for this stark, direct question.

So what to do? Again, my advice is simple. Prepare for this question! If you are confident in the business, in yourself and the plan you have put forth be ready to calmly state your pre-money valuation.  For example. “I’m glad you’ve asked. We’re at a pre-money of $X million and look forward to any other questions you have.”  If you’re not confident enough to set a pre-money valuation, maybe it’s best to ask yourself why before going out to raise capital.

What I’m trying to convey is this: Be prepared, be yourself, be honest. You win no matter what this way.

Should There be Profit in Knowledge? A Century of American Debate

 

This is part of my Series on University Entrepreneurship.

I recently hosted a talk by Geoff Smith of Ascent Biomedical Ventures entitled: Should There be Profit in Knowledge? Geoff is a fellow Williams College alum and recovering attorney who, like me, got ensconced in the world of launching companies and venture investing in the mid-nineties.  He’s a Managing Partner at Ascent which is one of the few truly seed-stage venture funds in New York operating in the biomedical tech space. He also happens to be a Scholar at Rockefeller University where he founded and teaches the University’s Science & Economics Program. (See here for his bio: http://bit.ly/gbnAC)

One thing I learned about Geoff during his talk is that he’s really a very deep thinker about public policy as it relates to university tech transfer. His lecture covered the evolution of the intense American debate in this field over the last century, from the time of the World Wars up through the passage of the Bayh-Dole Act of 1980, taking us right to the present day. His analysis wove in the scientific norms of Sociologist Robert K. Merton,  the effect of the Ransdell Act of 1930, and the pioneering work of Vannevar Bush (one of the gentlemen pictured above), who drove so much of the ground-breaking government policy in this field. Lastly, I'll say that Geoff’s conclusions were not what one might have expected from a venture capitalist. He has a real reverence for the singular importance of basic research to our society.

I left the talk and ensuing discussion with both a deepened historical perspective and greater appreciation for the transformative effect on our society that a century of American policy evolution in university tech transfer has wrought.  I also emerged perhaps with a keener understanding of its boundaries.  Fascinating stuff and many thanks to Geoff.

For Part Eight in this Series, click here