Archive for May, 2008

Venture Fairs: Are they worth it?

The Canadian Innovation Exchange took place in Toronto recently. It’s one of a host of similar conferences where startup entrepreneurs pitch their stories to VCs. The topic for the day is: Are these venture fairs worthwhile?

The short answer is: it depends. You should go to these fairs if:

  • You’re a 1st time entrepreneur, have not raised VC before, and / or just don’t have connections to book meetings with VCs directly
  • You have the spare time to go and sit in the sessions and learn
  • You’re a professional and looking to get clients in the space
  • You are a speaker (on a panel, not pitching your company)

Don’t expect to hook a VC at this show. For most investors, these shows are for investor-investor networking. The company pitches can be a distraction. This is a shame because the companies there make a real effort. I’m generalizing of course, and I’m sure there are many VCs who really do check out these companies, but on the whole, it’s not their top priority.

Personally, I avoid them. The last time I went was 2004. There is a prevailing view that the best companies and most experienced entrepreneurs skip these shows. Still, for every rule, there’s an exception: There are some good companies there this week that include 1st time VC-backed entrepreneurs like Ben as well as seasoned pros like Austin. So, their presence alone contradicts my opinion.

So, I guess it’s up to you at the end of the day. Go if you need to build your relationships and / or learn about VC. Don’t go if your goal is to land the VC that will fund you. You may be disappointed…

Mark MacLeod

The Art(istic side) of the Deal

Andy Nulman, Co-founder & President of Airborne Mobile.

Please visit his blog by clicking here.

Although I have spent many hours in meetings with, and accepted impressive sums of money from, VCs, I must admit that I am kind of a “fish out of water” in your world. Other than the perfunctory pitch sessions where I feel like I’m on autopilot or trial, the words I’ve exchanged with VCs over the years have been essentially limited to “Thank you” and “We will be EBITDA positive by next quarter.”

You see, I’m the “creative guy.” The “idea man.” The necessary evil for the return on your investment. I used to think that my type was about as relevant to you guys as a sea squid is to a hot air balloon, but after seeing Dr. Richard Bruno (a Venture Partner at iNovia Capital) speak at a VC conference a year or so ago, I realized just how very important I am. Not only to the end result…but to the process of getting there.

Of particular interest in Dr. Bruno’s dissertation was his “Bizplans-to-Bucks” timeline, in which he takes entrepreneurs down this startling path of reality:

1,000 Business Plans Are Written

150 Are Moderately Credible

50 Are Interesting To Read

20 Undergo Due Diligence

5 Get Funded

1 Makes Money

The big shock here is not that only 1 in 1000 makes money; the big shock is the qualifier of “Interesting To Read” as a crucial VC criteria.

Many times, as entrepreneurs try to appeal to their corporate audience, their brilliant ideas are sanded down and neutered by VC-speak. In trying to suck up to their hoped-for lifeline, they take an exciting project and render it lame, dull and, worst-of-all, unsellable.

I have a theory that goes “Everyone’s a Kid in Disneyland.” What I mean by it is that no matter how important or powerful you are, when you’re amongst flying Dumbos, giant Mickey Mouses, Space Mountains and Towers of Terror, you are stripped of all conceit and are a mere soda-sipping, popcorn-munching regular folk. Applied to the boardroom, Venture Capitalists are not robots; they are (for the most part) human beings like you and I, and as susceptible to the right excitement, creativity and sell job as the next guy.

Thus, entrepreneurs shouldn’t worry about adding some colour, some life, some pizzazz to their pitches. To put it into financial terms, it does not diminish the return; it compounds the interest.

And as Dr. Bruno points out, it may be the difference between being considered for funding…or ending up in the recycling bin.

Taking this into account, I have a little personal anecdote.

When Garner Bornstein and I put together our first business plan for Airborne Mobile (then known as Airborne Entertainment), in one of the pitch slides, I wrote that he and I were professionals with “pristine reputations.”

“Pristine?” he said. “You don’t use the word ‘pristine’ in a VC pitch! They’ll laugh us out of their offices!”

I gave in on about 14 other points in the presentation, as Garner was way better versed in the way of VCs than I, but I held my ground tough on “pristine.”

Cut to presentation day, and the VCs are sitting like statues as we plowed through our very grey presentation. Essentially, this was a one-way conversation tinged with gallons of flop-sweat.

Then came the fateful slide.

“Pristine!” Suddenly, one of the mannequins came to life. “Now there’s a word you don’t see too often!”

All of a sudden, the guys were animated and discussing the meaning of “pristine.” This led to questions about our past, and to hypothetical situations and projections of the business-to-be.

I looked over at Garner, who had a huge smile on his face, and gave me what soon came to be known as his trademark “life is strange” shoulder shrug. We were back in the game…

So we became one of the 20.

Then one of the five.

And best yet, we became the One.

So go crazy, you entrepreneurs. All you’ve got to lose is someone else’s money.

–Andy Nulman

The Case for Canadian Venture Capital

As a lawyer for entrepreneurs, I am often frustrated by my clients’ reluctance to seek local venture capital. There is a persistent view that Canadian venture capital is somehow second best to American or other foreign funds. This may or may not be true. (My own view is that having a rock star U.S. VC backing you won’t make a good business great; it may, however, help you fail more slowly.) What is clear is that there remains a growing divide between entrepreneurs and venture investors which needs to be addressed.

While this may seem to be about you, this post in fact is all about me. The continued health of my business depends on an expanding, sustainable base of good, well-fed entrepreneurs. I don’t believe this is achievable unless there is an alignment of startups and venture capital into one community. While there are many aspects to this issue, at its heart, it’s a question of marketing.

Is there any other industry that has so sharply felt the impact of negative publicity as has venture capital? Take a look south of the border: one day, everyone’s trading tips on the best place in Carmel to park your MIG. Then Blackstone files a prospectus disclosing private equity executive compensation and CEO Stephen Schwarzmann holds a few multi-million dollar parties. Next thing you know, Congress is overhauling its taxation of carried interests for everyone. Venture Capital may be the worst marketed industry out there.

Canadian private equity has been tarred with the same Blackstone feather in the public eyes, if only because it has not provided an alternate mission statement to the public at large and entrepreneurs in particular. I tip my hat to those labour-sponsored funds, who, in their heyday, tried to make the connection between job creation and local investing. Very few would argue, however, that the public right now sees much difference between venture capital and vulture capital.

If Canadian innovation is to scale, there needs to be a call to action for all participants in the ecosystem. This is a marketing exercise that needs to be led by you, the VCs. When was the last time you went to a bootcamp? Provided sponsorship dollars to entrepreneur-generated initiatives? Extended your channels in the US to provide a broader network for your portfolio? Many of these events are not immediately accretive to you, but they are vital to community creation. Let me re-phrase that; there has never been a more vital startup community, but it is one being fostered largely without VC involvement. This must not continue. The need to take a long-term approach to deal flow has never been greater.

Of course, it always helps to have a deep-seeded conviction that local partnering between VCs and startups matters. For me, this is the biggest missing piece: a mission statement that everyone can embrace. It’s also the easiest to solve. Think of the consequences of leakage (one of the most polarizing terms in the international development community). Every dollar of investment that comes from outside Canada ultimately leaks profit and wealth creation outside of Canada. There cannot be sustainable growth if the benefit of local innovation is reaped beyond our boundaries by private equity tourists. Every entrepreneur should feel a moral (if not economic) imperative to include Canadian VCs as part of its growth plans, and to serve as ambassadors for you abroad, directing deal flow from beyond your way (leak unto others as they leak unto you).

It’s time for you to make them believers.

Lijit’s CEO on raising money from angels.

todd.jpgTodd Vernon, the CEO of Lijit, has written a great article on raising money from angels. I especially like his taxonomy of angels:

The Family Investor: The Family Investor is likely not really a classic Angel Investor at all but rather a supportive family member that “knows you”. Their motivation is likely out of support (sometimes guilt), but their basic investment thesis is they trust you. For me these are the worst type of investor because you likely have intimate knowledge of their financial situation and whether or not they ’should’ be investing. Likely, they have no inherent feel if your idea is good or not, but may have changed your diaper at one time or another and have overcome that experience to hand you a check for $25K or $50K. Personally, I like this category of investor the least because the investment is totally emotional and personal – and that sucks in business. But based on the financial situation of the individuals involved and the relationships this can work ok if everyone comes into the situation with their eyes open, but go out of your way to make sure.

The Relationship Investor: The Relationship Investor is probably one or more co-workers from a previous gig or business friends you have known for a while. They may or may not understand what your new company is doing but they have had a track record working with you. They want to be supportive, but are looking for a return. You won’t lose them as friends if things go bad, but the investment for them is likely not ‘trivial’. In my experience these are good Angels to have, again as long as their eyes are open going in. These people can also be wildly supportive of you in terms of finding employees and other resources.

The Idea Investor: The Idea Investor is probably very familiar with the space your company is targeting. These are in some ways the very best types of Angels because to some degree they validate your idea. There investment is based on the Idea and there is little emotion around the table (always good). If you can get them onboard they can open doors into partner relationships and just generally good advice. You will spend most of your time convincing the Idea Investor that you and team are the right people to attack this problem (as they likely don’t have a strong relationship with you or the team). Often an influential Idea Investor makes a good early board member for the company.

The Once Removed Investor: The Once Removed Investor is likely connected through a personal or professional relationship with either the Relationship Investor or the Idea Investor. They likely don’t know you, and they likely don’t have a clue if your idea is good or bad but they have translated the trust in the investment to the person they know. This is a great way to get additional Angel Investors onboard, but without a solid Relationship Investor or Idea Investor it just isn’t going to happen.”

Read the rest of Todd’s article, it’s great.

10 Investment lessons learned over 10 years

Over the last 10 years I’ve also been closely involved with early stage technology funding (advising VC firms and Angels) and have invested personal time and money in early stage ventures. That has given me a unique perspective of the challenges between entrepreneurs and investors.

I’ve written about my Top 10 fund raising lessons for entrepreneurs, and dare to follow up with my Top 10 investment strategies that may be useful to investors and entrepreneurs, here:

1 ) Invest in the founders, but be wary if the company consists of technologists only. The ones that come in without an operating plan clearly do not understand what you as an investor are looking for. Get a real operator in early.

2 ) Invest in the business, don’t invest in technology. The statistics prove it: ninety-nine out of a hundred of the most innovative technologies never turn into successful businesses. Especially investors (both VC and Angels) that made their money in the hay-days of technology have a tendency to underfund the business side, providing a weak foundation for any technology to succeed.

3 ) Don’t invest in an early stage company with more than one product or service. Let the company become the King-of-One, rather than the King-of-None. Multiple products or services require more money to support successfully and dramatically dilutes the focus of the company. Multiple products or services also “invite” a larger group of competitors, making it hard for customers to perceive true differentiation and unknowingly, slows down adoption.

4 ) Don’t invest in an early stage company with more than one business model. Keep it simple. Multiple revenue models sound good, but usually don’t yield the projected outcome. The company should make all of its money in advertising or in subscriptions, not in both. Dilution of focus is costly and provides yet another reason for failure.

5 ) Don’t invest in companies that rely heavily on partner support early on. This is the typical David and Goliath phenomenon. Partners sell once the company does in overwhelming numbers. The company should always have direct control of its own business model first, before they allow any partner to reduce its margins.

6 ) Invest money or time, don’t do both. I very much relate to Carl Icahn in an interview with Dan Primack (on PEhub) with regards to CEOs responsibility to make the numbers work, and not to rely on investors to “add value”. The CEO is in the driver seat, take him out if he doesn’t produce.

7 ) Look for fundamental changes in customer experience. The Ultimate Driving Experience is what sets BMW apart, not just the timing in their engines. Customer experience is much more than a pretty user interface, it is an overall experience that spawns disruptive purchasing.

8 ) Watch how professional the team operates pre-funding as an indication of their interaction post-funding and with customers. Real professionals do everything with a purpose and I have mastered the art of detecting them. So well that I can tell from a visit to a trade-show floor whether a company is going places.

9 ) Don’t categorize investment allocations based on past investments or trends. Every company is unique and requires an amount of money unique to their assets: people, timing, market and ecosystem. If you don’t think you have a unique scenario, you probably don’t have a valuable investment opportunity.

10 ) Invest with passion but don’t fall in love with the company. Investing is the ultimate flirting game, but it is usually a bad idea to get really involved. Your asset value is the selection and performance of all the companies in your fund. Stick with what you do best.

From an investment perspective I see many “sub-optimizations” but not a lot of real great innovations these days. I do blame the current investment model for that sometimes. We, in Silicon Valley, have too many technology investors using the same rear view-mirror investment criteria. Although I have a lot of admiration for Apple, it is a bad sign when we need to leave real innovation in the hands of large companies like theirs.

The landscape for investors is about to change dramatically, no longer can they just continue to invest in proprietary technology silos at single digit valuations. They’ll soon need to broaden their experience (“in search of the Economist VC”) to understand the macro-economic impact of marketplaces, platforms and the impact of technology to other industries.

A wonderful long road for technology innovation and investing still lies ahead.

Getting a VC’s Attention

It’s hard to get a VC’s attention – as much as i told myself I’d be diligent in reviewing all the great ideas coming my way, it’s impossible when I get several new plans a day, work hard to help existing companies, proactively evaluate new sectors, and keep up with my network of friends and associates.

Having been at this for a year now, I can tell you from experience what maximizes the chance of getting the ear of a VC. The key is to present a crisp, clear, and importantly CONCISE view of your business in a snapshot that we can easily digest.

I agree with David Cowan’s post that the best way to pitch your business is a simple 10 or so page powerpoint. Check his post out to get some great tips on what to include in the powerpoint. It’s not meant to be an exhaustive plan – just enough to get our attention and get us excited and establish your credibility.

It may be a bit harder to generate a powerpoint (and some entrepreneurs like to pitch without out seemingly just to be different) but its worth the effort to help you synthesize your thinking and help attention-starved VCs focus on your opportunity. I tend to lose focus and get impatient pretty quickly when wading through text heavy plans or very hollow one page exec summaries (ideally provide both the powerpoint and one page summary so we can pass around the latter to our partners to get them quickly up to speed on the company).

I would also add the usual but important statement that sending us an email out of the ether doesn’t get our attention as much as finding someone who knows us and having them introduce you. Try a great social networking tool like LinkedIn if you are unsure who you know at a VC firm.

Good luck!

Announcing the iWear Fund

Over the past few years, I’ve spent a lot of time thinking about how people communicate with each other. As an active user of all computer based communication technologies such as email, IM, web collaboration, and twitter, I realize that direct, bite size communication is often effective. However, given the lack of persistence of data in these mediums, I’ve felt like something was missing.

For as long as I can remember, I’ve been a huge fan of t-shirts and have an extensive collection. I’ve noticed that the vast majority of my entrepreneurial colleagues prefer t-shirts over other types of dress wear. Finally, the t-shirt industry has grown nicely alongside of the software and Internet industry, as most companies have accelerated the growth of the t-shirt industry through their use of swag.

I’ve concluded that the opportunity to transform this market is ripe. Fundamentally, I believe that technologies like instant messaging are going to be replaced by t-shirt messaging. After much thought, I’ve decided to work with my partners to create a new fund we are calling the iWear Fund. This fund will be a first mover in the market, investing in the best young t-shirt designers, thinkers, collectors, and technologists.

We’ve already identified several promising young companies, such as VCWear and StartupWear. We are very interested in companies that have deep intellectual property in this area, especially patents, as we think this is an underserved market for patent trolls and if we can get out ahead of them, we can help our portfolio companies create an unassailable position. Like most investors, we expect there to be some overlap in our portfolio due to the proximity of similar technologies (such as VCWear’s new line of StartUp t-shirts) – we’ll work to resolve those conflicts when they arise.

As part of our investment thesis, we are focused on helping create several new platforms to enable the expansion of the t-shirt industry. We realize that these platforms may have applicability outside the t-shirt industry, but expect that this fund will – at least for now – limit itself to only t-shirt related technologies.

While forming this new fund, we looked for deep thinkers in the intersection of the t-shirt and software industry. Simultaneous with the announcement of the fund, we are honored to announce that Dan Primack is joining as an advisory board member. Dan writes the very popular PE Week Wire and was one of the first industry insiders to identify the huge potential of the t-shirt market. While Dan’s first effort to create PEWear was co-opted, we know that he has a collection of dozens of t-shirts, including some from the rock concert and professional sports sectors, and will be a huge help to us in identifying promising new t-shirt segments to invest in.

We’ve been asked by some whether, given the current credit crisis, now is a good time to launch a fund dedicated to t-shirt investing. While we expect there to be a slow down in certain areas of the market, especially around LBOWear, HedgeFundWear, and AuctionRateSecurityWare, those areas have historically not been meaningful consumers of t-shirt technologies beyond generic white undershirts, so we are not concerned about our timing. All markets are cyclical and we expect to be investing in t-shirt companies for a long time to come.

The Delicacy of European Investments

Originally posted by Georges van Hoegaerden, Managing Director – The Venture Company.

I just came back from a trip to Europe and let me tell you: Belgian chocolate, raw herring from Holland and ficelle from France – nothing is more authentic and delicious.

But few of these travel well or find a large deserving audience in the United States. Much like technology.

The state of the technology industry and the accompanying investment ecosystem in the US are quite a bit more developed than in Europe, 15 years at least.

In the US, roughly $30B per year is poured into early stage companies by some 300 investors in my backyard in Palo Alto, not including Private Equity deals. In contrast, only a handful European early stage VCs exist and the majority of all european investments are late stage investments done by Private Equity firms.

In Europe, early stage VC valuations hover around $1M, compared to $4-7M in the US. As a result desperate european entrepreneurs often default to Angels that show some flexibility, but those investors are often very inexperienced with the technology sector and early stage investing or the combination. They made their money somewhere else. Because of the young history of technology success in Europe, very few european investors (either VC or Angel) have actually had the personal experience of building an early stage technology company from scratch.

To sum it up, european investors (with a few exceptions) take large early equity stakes, provide limited relevant business insight and push those companies to early profitability (even at 250K euro investment levels). Selling a product or a service too hastily, before it is ready to enter a global marketplace delivers NO validation of the business, good or bad. But it is a sure way to slow down its innovation and differentiation.

So, underdeveloped access to quality early stage money makes life of entrepreneurs in Europe quite difficult.

But, let’s assume you passed the bar on all the above and your company is on its way to the United States. No one can stop you in the pursuit of the great early exit opportunities only Silicon Valley can offer.

So here are some things to be aware of:

1/ A cherry, picked by an investor in Europe is not always a cherry in the US. Be sure you understand – or seek advice about the timing differences between continents that attract follow-on investors in the US. Some of that timing has to do with technology, but market timing is even more crucial.

2/ Plan ahead. Allocate a larger fundraising runway than you would in Europe. To US investors foreign companies are yet another risk they need to mitigate. By default you are less attractive than a US company.

3/ Modify your operating plan. Change it from a plan to profitability to a plan to market dominance (which could include profitability but can also have other primary denominations as drivers, such as owning a majority of eye-balls in the consumer space).

4/ Move your headquarters to the US. Without it you’ll find very few US investors interested.

5/ Assuming you get this far, be open to a recap. US investors understand the equilibrium of shareholdings will provide the best business value, not exorbitant ownership of the initial investor achieved through a low initial valuation. But since the US valuation should increase significantly, the initial investors should not lose too much net value, if at all.

6/ Hire a local management team that understands how to perform in a petri-dish that is quite different from Europe.

My final recommendation is to be prepared before you come over and not put your head in the sand, I can give you a long (and still growing) list of foreign companies that were forced to move back.

For larger US VC firms there is a fantastic opportunity to scout for technologists in Europe and fold them into their US investment model before they’ve taken in too much local money. I see technologists in Europe building innovation that is at least as good as the in the US. Remember the most delicious chocolates from Belgium?

But, the worlds largest chocolate factory is Hershey’s located in the US. The name of the game remains matching sufficient technological capability to a fast growing market, in the same way Hershey’s reaches a much larger audience than Belgian chocolates – with a quality that is good enough for most. Market timing, not technology, is key.

I Was A Teenage VC

They say there is a broken heart for every carried interest still on Bay Street. I can’t say for certain that this is the case; after all, I never knew the pain of investing in YOUtopia or Where’s Frankie. However, as a member of the VC Class of 2000, I did experience first hand some of our industry’s growing pains. Here’s my story:

It was the spring of 2000: NASDAQ was falling apart but, mercifully, the boy band N’SYNC was still together. I received a call from a local headhunter. BCE Capital was looking for new team members; was I interested? I was particularly fond of VCs at that moment, since the group behind my last company had managed to find someone who would pay $470 million for it. So I agreed.

Everything I know to be true about the value of Canadian venture capital I learned in those next two years. That’s not to say that venture capital is a perfect industry. If we’re being honest, some of you can’t park for beans. Given the number of scrapes you’ve collectively placed on the pristine walls of California’s many parking garages, it’s a wonder they still allow Canadians to attend CTIA at all. And others need to seriously rethink your pant choices. Like the fabless semiconductor industry, the moment for acid wash jeans has long passed.

But the patience and mentorship of those who welcomed us in the Class of 2000 ranks has had long-lasting effects. Many of us who moved on have remained active in the start-up community in other forms. I think this is in large part because we were taught how when to embrace and support entrepreneurial risk. The hardest thing to learn in venture capital is how and when to say “yes.” After all, you can’t have a lousy ROI if you don’t actually invest. The watershed moment for me as a venture capitalist came when I stopped looking for a low-risk deal and found one that was acceptably risky for all the right reasons. If I could just take back my hairstyle, those years would be among the best I’ve spent in business.

Interview with VC-TV

Chris Arsenault sits down with VC-TV (Venture Capital TV) about the upcoming CVCA annual conference “Face of Change”. You can meet Kristina and the VC-TV team at the CVCA Annual Conference.