Category Archives: Invested Interests

Invested Interests

7 Keys to Positioning Your Competitors to Investors

Steve Jobs and Bill Gates image via Facebook.com

Every entrepreneur should spend plenty of time thinking about competitors, and how they relate to your business, but you need to be very careful what you say out loud about them to your team, your investors, and your customers. What you say speaks volumes about how you think about your startup, how smart you are, and your personal integrity.

I’ve spent hours talking to startup founders, and heard a thousand startup pitches, and I always listen carefully to what is said (or not said) about competitors. Everyone has a view on competitors, so you will likely get some off-the-cuff questions on this subject as well. Here are some common pitfalls or traps to avoid: Read more

Invested Interests

Great Startup Teams Foster a Culture of Likability

Larry Ellison Photo by Oracle PR

You don’t have to be likeable to everyone to be a great entrepreneur, just to the people who count. Of course, we can all point to apparent exceptions, like Ted Turner or Larry Ellison, who are sometimes seen as lions, downright predators, or even jerks. Yet I’m told that even these guys are considered quite likable by an intimate group of business and personal associates.

So likability is an elusive quality. It doesn’t mean always being perky and bright and constantly being happy. What makes each of us likable is distinct to us, and to some degree it’s in the mind of the beholder. But the basic drivers of likability are the same for most of us, and Michelle Tillis Lederman, in her book “The 11 Laws of Likability” has summarized these nicely: Read more

Invested Interests

Convertible Notes have a clause that the investor can ask for the money back. How often is this used?

The question should be “used for what?”

Because convertible notes are designed to give investors an equity interest in a company that will eventually be worth much more than their investment, the intention on their part is always to convert into equity (after all, if they were just after the interest on a loan, they could find much less risky things to invest in than a startup.)

Therefore, the only reason that an investor would NOT convert into the next round of equity would be if the company was doing so poorly that there was no such round. (Think about it this way: assuming a convertible note with a valuation cap, which is what all smart investors would do, it would always be to the investor’s advantage to convert, regardless of whether the valuation of the round was high or low.)

But the flip side of this is that if the company is doing so poorly that it can’t raise another financing round, it is also highly unlikely that it will have the cash on hand to repay the debt, so there would be no purpose to be served by the investor asking for the money back…because they couldn’t get back what doesn’t exist.

So therefore, if the repayment clause is not used to get the money back, what is it used for?

It is used as an incentive (carrot/stick) for the investor and the company to sit down for a heart to heart talk, and figure out what to do next…with the balance of power this time in the hands of the investor, because the company was not able to deliver on its projections.

  • If things are generally going pretty well, the investor(s) will usually extend the note to give the company more breathing room, maintaining the status quo.
  • If things are going not so well, and it doesn’t look like there will be a follow-on financing round any time soon, the investor and company might agree to convert the note into equity at a previous (lower than anticipated) valuation (if there had been a previous round) or at whatever valuation they agree on.
  • In a worse case, if the company is really in bad shape, the investor can pretty much dictate whatever terms s/he wants, using the implied threat of otherwise forcing the company into bankruptcy because it can’t repay the debt.

 

While that last option sounds pretty horrendous, in practice I have seen it used mostly for good. There are many permutations of what “good” could look like, but essentially holding a past-due note from a company that can’t repay it, is like holding a nuclear weapon: using it probably destroys all value for everyone, but the ability to use it, like the geopolitical theory of Mutually Assured Destruction, means that everyone is at least forced back to the table to negotiate a way of saving the company.

*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *

Invested Interests

Startup Execution Transcends the Idea From Day One

Apple NYC image via The Washington Post

A startup begins with a great idea, but all too often, that’s where it ends. Ideas have to be implemented well to get the desired results. Good implementation requires a plan, and a good plan and good operational decisions come from good people. That’s why investors invest in entrepreneurs, rather than ideas.

People and operational excellence have to converge in every business, large or small. Microsoft found this out when their market capitalization, once at $560B, had fallen in 2010 to $219B, allowing them to be passed by Apple, who grew from $15.6B during that period. Apple is now at $570B, with Microsoft at $240B. Both had access to the same technology, people, and market. Read more

Invested Interests

Angel Investors Do Make Money, Data Shows 2.5x Returns Overall

I began studying angel investing returns about 10 years ago as a result of a problem I couldn’t resolve: The investing world seemed certain that angel investors were rubes. Conventional wisdom dictated that they made reckless investments in very early-stage ventures mostly doomed to fail. And whenever they might come close to succeeding, savvy “professional” investors would just swoop in, cram them down, and win the real returns. In addition, angels were up against a selection problem: All the best entrepreneurs and opportunities would naturally gravitate to the best venture capital funds, leaving only the “scraps” for angel investors.

So which is it? Are angel investors just unwitting philanthropists or legitimate entrepreneurial investors? Read more

Invested Interests

Startup Map & Trends Analysis – September 2012

September’s Startup Map showcases the latest trends in startup profiles created on Gust between September 1st and September 30th. Some of the entrepreneurs chose to keep their startup profiles private and therefore are labeled as unpublished in this month’s map, and were not included in the trends analysis.

In September the US has once again shown the highest concentration of startups, even though there was a decline when compared to the month of August. Canada also saw a decline, falling from second to fourth place. Meanwhile, France prevailed with a double-digit percent increase, jumping up one spot and into third place. The newcomer to the top five countries in September was the UK, which more than doubled its prior amount of monthly startups. Other countries with a surge in new companies are Colombia, Australia, and Spain.

Within the US, California significantly led the startup scene, while New York, Florida, and Texas followed closely behind in subsequent order and remained in the same top places as August. Georgia and Pennsylvania bumped Illinois out of the top five, and were tied for fifth place. However, the states with the highest monthly increase in percentage terms were South Dakota, Kentucky, and Hawaii, also likely due to their small baselines, but yet demonstrating a potentially interesting trend.

The top industries stayed relatively unchanged from the previous month, with Internet/Web Services and Consumer Products and Services leading worldwide. Interestingly, two new industries made it into the top ten, Education and Clean Tech, both with double-digit increase rates. The US is the leading country for the Education industry, with every 1 out of 2 startups in Education coming from the US.

Not surprisingly, many new startups across the world are in the development stage. This means almost 1 out of every 5 startups have a product in development, whereas less than 10% are product ready, and even less are in revenue stage, which make up only 3%.

Check back soon to read October’s edition of the map and trends analysis.

 

 

 

 

 

Invested Interests

2012 Valuation Survey of Angel Groups

This summer I conducted our third annual survey of the pre-money valuation of pre-revenue companies recently funded by angel groups in North America.  Access to our 2010 and 2011 surveys can be found at 2011 Valuation Survey of North American Angel Investor Groups.

We received data from thirty groups of the fifty angel groups from whom we requested data.  For the first time, we asked for data from specific business sectors, as follows:

  • All pre-revenue deals
  • Pre-revenue life science, biotech and medical device deals
  • Pre-revenue software, internet, mobile and telecom deals
  • Pre-revenue energy and clean tech
  • Other pre-revenue deals

We asked each group for their median (middle) pre-money valuation of pre-revenue deals.  For purposes of this survey, companies with less than $200,000 in current annual revenue run rate are to be considered pre-revenue. Read more

Bill Payne , Angel Investor , Frontier Angel Fund
October 16th, 2012 3