Raising Capital (1): What’s it Really All About?

This is part of my Series on Venture Capital.

‘Raising Capital’ for one’s start-up is perhaps one of the most talked-about and important aspects of early-stage entrepreneurship there is.  And despite the amount of attention and discussion the topic receives, I also think it is perhaps the most misunderstood of all.

At some point, all start-ups, (whether they be university spin-offs, services/consulting companies and/or technology companies), that aspire to some conventional measure of growth and success will require operating capital of some kind.   As someone who over the past sixteen years has raised millions of dollars in capital both for my own start-ups and for several dozen university spin-offs, I’ve definitely developed a feel for what I believe works and for what doesn’t work.

In this series we explore the challenges, myths and rules of thumb that apply to this process and of course welcome your input.

Angel Investing (3): Judging the Team

               

This is part of my Series on Angel Investing.

Another observation I’ll make is this. With the advent of the internet we’ve obviously seen a remarkable democratization of information and in particular, unprecedented access to heretofore difficult-to-obtain information. Previously arcane disciplines such as venture capital, for example, have been “opened-up” and laid bare for anyone with a laptop and some free time to explore.  Chess is another example. In the past decade the internet and sophisticated chess software programs have created the phenomenon of the 12 year old Grandmaster! No longer are years of practice and study with dusty old chess tomes and wizened instructors required for a really talented human being to acquire the knowledge needed to ascend to this kind of playing strength. Now 10 year olds can course through thousands of classical grandmaster games with the click of their mouse and, through pattern-recognition and raw talent traverse in a few years’ time a landscape that required almost a decade of study only a generation ago. Do we even need to discuss the technological revolution we’ve seen in golf? Videos, DVD’s, handheld GPS devices to tell you the yardage, hybrids, belly putters, and titanium shafts lined with kryptonite. Everyone has access to equipment that Sam Snead could have only dreamed of.  We now see things that are shocking to the senses as a result. I already mentioned the spectacle of the baby Grandmaster in chess. What about that celebrity golf event I stumbled upon on TV a few years ago? Remember that kid actor from the movie Sixth Sense who could “see dead people”? I watched this tiny fellow stride up onto the tee like King Kong, suddenly pull out his driver like it was Excalibur and start smashing huge drives way out there on every hole. I think he was hitting it past Marky Mark. He'd probably hit puberty by then but still looked like he was maybe 15 years old to me. No doubt he’d shelled out a lot of his movie royalties for professional golf instruction out in L.A.

For the most part though, most of us who are not quite in the league of the Andreesens, Kasparovs and Tiger Woods’ of the world are simply walking around with an immense amount of superficial information in our heads. (Certainly an order of magnitude more than our parent’s generation). Thousands of Google and Wikipedia searches, films, DVD’s and the like are no doubt responsible for this.

And in this particular context- which involves the judging of entrepreneurs, you’ve simply got to be aware that plenty of people looking for funding have read pretty much everything that’s available on the net having to do with raising capital. So what I’m saying is that a ton of entrepreneurs you’ll meet all “know what to say”.  You’ve just got to get good at seeing when they don’t “know of what they speak”.

The bottom line is: just look for authenticity. You’ll know it when you see it.

For the next post in this Series, click here.

University Spin-Offs (5): Angels in our Midst?

This is part of my Series on University Entrepreneurship.

 Angel Investors are the absolute life-blood of start-ups and early-stage investing in this country.  Angels are the ones who get involved with entrepreneurs at the earliest, highest risk stages of a venture, bringing that essential capital- as well as a high degree of support and enthusiasm. Let me take this one step further:

Angels are also the life-blood of university spin-offs.

It is actually a common misconception that university spin-offs emerge from the academy with venture-backing. Despite an enormous amount of bluster and braggadocio in the industry, this is actually the exception as opposed to the rule. The overwhelming majority of university spin-offs emerge from the academy ab-initio with angel funding (if they actually have funding of some kind). It's the hope that after a year or more of development, some percentage of such companies will be ready for a traditional institutional venture-round of financing.

Is it true that sometimes there is such an appealing mix of well-baked and extraordinary technology and the availability of a committed team that a company will spin-out of the academy with institutional venture financing? Yes, it does happen and that's terrific. But again, most of this heavy lifting is done by angels and/or angel/entrepreneurs at this nascent stage.

The emphasis on venture financing one encounters at various tech transfer conferences and public discourse on the matter thus misses this essential point and may be a contributing factor to the fact that many tech transfer offices do not recognize the importance of Angels to this ecosystem. 

As someone who has been on both sides of the table, my view is that when those in tech transfer offices run into legitimate and respected people who happen to be Angels, we ought to respect their time and enthusiasm. They are most often folks who have run successful businesses before, love being helpful and want to stay active in the arena of company building. 

For Part Six in this Series, click here

Angel Investing (2): It's Personal

This is part of my Series on Angel Investing.

So I’ve established in a rather primitive post that I believe the leader/team is essentially everything.  If you’re in the world of start-ups and early stage investing I’m sure you’ve heard this from certain people over the years. I did too. But the funny thing was, hearing it only means so much. You don’t really come to understand what this truly means until you live through it and feel the pain of mistakes you’ve made personally and also through the good times when your decisions have actually worked out.

Wait, did I just coin another aphorism?:

Angel Investing is Personal.

Yes. It’s all about people and human relationships. And just like any other activity involving other human beings it can be a ton of fun and in some cases, quite frustrating.

What it comes down to is finding and backing people who have the right combination of qualities, experience, talent and character and supporting them as much as you can. (We'll get into just what I think these qualities are in future posts).

So if you are looking to get into angel investing you really need to think about this in a profound way. Talk to a bunch of experienced angels before you dive in.  Most of the time we hardly realize how little we actually know when we start participating in a new activity.

For Part 3 of this Series, click here.

University Spin-Offs (4): Professor as CEO?

This is part of my Series on University Entrepreneurship.

 A question that comes up often at various conferences is whether the inventor/professor should leave the university to launch the start-up as the CEO. Whereas in extraordinary situations this may be appropriate, for the most part, it is not a good idea for a number of reasons.

Ideally, a university spin-off, (like any other start-up), should be run by an experienced and talented entrepreneur with a deep network of contacts. It’s just a fact that most professors are not in this category. Most investors can regale you with a few unfortunate tales of woe in which they violated this maxim and backed a CEO professor who left the university to spin-off a company. There are less such cautionary tales of late because most experienced investors just won’t do this again. The investment community has learned from its mistakes over the last 10-15 years.

The other reason it’s not such a good idea is that the inventor/professor can be incredibly valuable to the spin-off without leaving the academy. He or she can keep working in the lab, keep teaching students and at the same time serve as a Chief Scientific Advisor and shareholder in the company. Most schools allow a professor to hold equity in a spin-off so long as the spin-off does not fund research in the professor’s academic lab.

The last major reason the professor should stay put is that often, one can achieve a  very effective ‘technology transfer’ simply by hiring a graduating PhD student from the professor’s lab. This is often a terrific way for the start-up to benefit on an ongoing basis from the human/technical expertise/know-how that is so critical to the future development of the ultimate product.  

For Part Five in this Series, click here

University Spin-Offs (3): Suffering from Entrepreneur's Block?

This is part of my Series on University Entrepreneurship.

 If you’re an entrepreneur looking for your next start-up, of course it’s probably best to have your own idea for a company. No doubt you’re enmeshed in your city’s local entrepreneurship network- but if you really have a bad case of entrepreneur’s block and haven’t come up with anything worthwhile lately, you might consider paying a visit to your local university tech transfer office. Never heard of tech transfer you say? Been too busy building companies? Ok, start reading my first posts on this subject,  

http://bit.ly/d1aCk and catch up on this thread.  

You may be amazed to learn that some universities spin-off up to a dozen companies a year based on their IP. Sure it’s true that some of these are “faculty-vanity” plays, but there’s plenty of good companies emerging from the academy.  

I’ll let you in on another fact: If you’ve got a few successes in your past, you’ll be very welcome when you show up. See if they have a person running their start-up arm, sometimes called  “new ventures” or “the venture lab”.

So pay a visit, introduce yourself and they’ll keep an eye out for you.

For Part Four in this Series, click here