Invested Interests

A Visit With the European Startup Community

My wife, Ann, and I took a trip this past spring to visit Estonia, Finland, Ireland and Russia. The goal was to share our experiences in the realm of angel investing with an array of global audiences, by participating in various lectures, discussions and workshops. In all four countries we met passionate entrepreneurs who were eager to discuss their exciting startups, as well as angel investors looking to support them.

Ireland
Upon arriving in Dublin, we were met by our hostess, Diane Roberts, for a leisurely drive to Belfast. We had a lovely time in Northern Ireland.  The following day, I delivered a four hour workshop on capital sources and pitch strategies for fifteen entrepreneurs in the Propel program.  Later that afternoon, we visited the phenomenal new Titanic Experience – Not to be missed! We finished our first full day at a dinner with Halo, the Northern Ireland Business Angel Network (Alan Watts).  I enjoyed giving a short interview on BBC radio the following morning, after which a dozen Halo members participated in a workshop I led on portfolio strategy and post-investment relationships. Finally – after that workshop at the impressive Northern Irish Science Park – we took a picturesque train ride back down the coast to Dublin.

On Wednesday, April 18th, I gave a keynote speech on US Startup Valuation Trends  for the 1st Irish Angel Meetup.  Two hundred angels, entrepreneurs and members of the startup community attended this inaugural event. It was organized by Diane Roberts of Xcell Partners and held at the StartupBaseCamp accelerator in Dublin.  In the afternoon, I led a master class for thirty prospective members of the new Colman Investors, focusing mostly on how angels can work together in groups more efficiently; afterwards, we heard pitches from two entrepreneurs.

On Thursday, I spoke to entrepreneur groups at both the National Digital Research Center and the DIT Hothouse. Topics of conversation included how to identify fundable companies, trends in funding, business plans, and pitching to investors.

In addition to enjoying the delightful pubs and restaurants, some Dublin sightseeing highlights included visiting Newgrange, touring the Old Jameson Distillery, and watching the live musical comedy “Legally Blonde.”

Between Northern Ireland and Ireland, I spent nineteen hours in front of audiences, while delivering eight lectures and workshops to one hundred and sixty-two entrepreneurs and one hundred and ninety angel investors.

Moscow
In Moscow, we attended the twelfth annual Congress of the European Business Angel Network, held April 23-24, at the Digital October technology entrepreneurship center.  Three hundred and twenty-five delegates participated in an interesting program highlighted by a gala awards dinner boat cruise on the Moscow River, with Frank Peters acting as master of ceremonies.  Philippe Gluntz, President of France Angels, was honoured as the 2012 EBAN Angel of the Year, while the Finnish Business Angel Network (FiBAN) was recognized as Business Angel Network of 2012.  Views of the Moscow Cathedral, the Kremlin and Red Square were marvelous from the cruise ship.

Estonia
Tallinn is the capital of Estonia, located just across the Bay of Finland from Helsinki.  We arrived from Moscow on April 25th; the following day, I spoke on Raising Money to Go Global at StartSmart, a conference held at an incubator and innovation center named Technopolis Ülemiste.  One hundred and fifty entrepreneurs and community members attended the monthly conference, which alternates between Tallinn and Helsinki.   On the 28th and 29th, I lectured and mentored more than a dozen entrepreneurs as part of the University of Tartu’s DDVE program, led by Mart Kikas.

On May 2nd and 3rd, I led workshops for about thirty Estonian investors on syndication, due diligence, valuation and the post-investment relationship with entrepreneurs. Over dinner the next day, I assisted these Estonian angels in a screening session of three entrepreneurs who pitched interesting startups.  These efforts were organized by Merit Imala and the Arengufond Estonian Development Fund team.

We found Tallinn to be both a delightful place to visit and the best preserved medieval city in Northern Europe.  Great museums, a large section of the 14th century city wall, wonderful cobbled streets and delightful restaurants are all within a short walk of modern hotels.  We also discovered that Estonians love to sing.  The Tallinn Song Festival Grounds provide a stage for fifteen thousand singers to entertain audiences of over one hundred thousand people.

In Estonia, I was in front of audiences for twenty-one hours, while delivering seven workshops and lectures and mentoring twelve entrepreneurs.  Audiences totaled over three hundred and eighty entrepreneurs, investors and members of the startup community.

Finland
A two hour ferry ride across the Bay of Finland carried us from Tallinn to Helsinki. On the morning of Monday, May 7th, I led a workshop on angel groups for an audience of about seventy investors and entrepreneurs organized by the award-winning Finnish Business Angel Network (FiBAN).  That same afternoon, FiBAN organized a two-hour workshop on Due Diligence in the offices of PricewaterhouseCoopers.

The following morning, I delivered a workshop on Valuation and then spoke about United States Startup Boards to two hundred delegates attending the Boardman conference (Boardman is Finland’s leading corporate governance organization) in Finlandia Hall.  In the afternoon, I spoke to forty entrepreneurs about how to pitch investors,  then coached seven entrepreneurs on their presentations at Finvera.  The evening was capped off with a reception attended by one hundred and twenty-five leaders of Helsinki’s entrepreneur/investor community at the historic Nordea Bank facilities. After a day of touring Helsinki, I delivered a workshop on exits the following Thursday morning.

Afterwards, I held a pitch session at which four entrepreneurs presented to thirty angels (plus visitors) in the Startup Sauna, an accelerator located at Aalto University.  After formal presentations, I had an opportunity to meet many of the fine teams there at a casual BBQ.

The highlight of Friday, May 11, was participating in a panel discussion on how to encourage entrepreneurship in Finland. I was joined by Prime Minister Jyrki Katainen at the new parliament facilities before an audience of about one hundred and fifty.

Ann and I had the pleasure of glorious Spring weather in Helsinki.  We enjoyed a delightful harbor cruise  and walked along Esplanade Park from the wonderful Hotel Kamp, taking in the views from Palace Restaurant, the Torni Tower, and many other sites in the city.  Ann visited Aniola Villa, the home of famous Finnish composer Aino Sibelius, about thirty minutes outside of Helsinki.  Then, on Friday, May 9, our hosts treated us to a wonderful piano concert of Sibelius compositions at the new Helsinki Music Centre.

Our FiBAN hosts – led by Claes Mikko Nilsen, Feodor Aminoff and Jan D. Oker-Blom – treated us like royalty during our visit.  Overall, I spent twenty hours in front of audiences totaling nearly eight hundred people. I delivered six workshops, mentored a dozen or more entrepreneurs, and was the subject of five press interviews.

St. Petersburg
We ended our European stay with a train ride to beautiful and historic St. Petersburg, the northernmost city in the world with a population exceeding one million.  From our small hotel near Nevsky Prospect, we were able to visit most of the sites in or near the central city, including Peter and Paul Fortress, the Church of Our Savior on the Spilt Blood and St. Isaac’s Cathedral.  We enjoyed a boat ride on the Neva River, as well as walking/auto tours with angel investors Dmitry Rumyantsev and Michael Podgaiets.

Summary
We visited four countries in Europe over a month-long visit.  In total, I delivered twenty-one lectures and workshops, conducted ten press interviews, participated in four panel discussions, and mentored over two dozen entrepreneurs. I spent sixty hours in front of audiences totaling about sixteen hundred angels, entrepreneurs and members of the entrepreneur/investor community.

Bill Payne , Angel Investor , Frontier Angel Fund
July 12th, 2012 1

Invested Interests

If I join a company as a co-founder, should I ask for a board seat?

A board seat in and of itself has no particular value, and is often something to be *avoided*, rather than sought out. It doesn’t give you more cash compensation, more equity ownership or more direct control over the operating business.

The legal role of the board is to make strategic and corporate-level decisions, hire/fire the CEO, and represent all of the stockholders of the company. Indeed, being a member of the board of directors means that you have a legal, fiduciary responsibility to the other investors, and are required to put the stockholders interests ahead of your personal ones.

So the question you need to ask yourself is “why do I want to be on the board”? If you are going to be a true co-founder (and 20% equity sounds like it), sharing over-all decision making about company direction, strategy, financing, staffing, etc. with one or more co-founders, and you see that role continuing in the future, as the company’s President or Chief Operating Officer, then being on the board might make sense. Similarly, if you are putting cold, hard cash into this pre-funded startup, along with your time and skill, then that may well warrant a board seat to protect your money.

But typically, a seed startup board would only have three members (often one founder, one investor, one independent), expanding to five around the time of a full Series A venture round. That means if you’re not the CEO (who is also presumably a founder and who really needs to be on the board), then you’d effectively be taking the remaining non-investor seat. Ask yourself if that would make more sense for the company than having it occupied by one of the other co-founders, or by an outside director who may be able to bring direct value.

One approach that hasn’t been mentioned, and that I’ve seen in some cases, is for one or more key members of the senior management team regularly sit in on board meetings as an observer, either by custom or by right. So you might consider asking for Board Observer status to be written into your agreement.

However, this issue is an immediate one: if it doesn’t happen now, it certainly won’t happen in the future (nor would it make sense). Over time, founders typically *leave* the board as they are replaced by an increasing number of investors/independents. They don’t *join* it later.

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

Pivotal Moments

7 Ways to Cure Post-Pitch Depression

It’s one of the most frequent questions: What if I can’t get funded for my deal? What next? Do I keep trying forever, drowning in the myth of persistence? Who can I complain to? Where do I get my appeals hearing? 

Here are my seven favorite cures for post-pitch depression. 

  1. Scale down and focus: So don’t be the next Facebook, at least not immediately. Go back into your plan and find the core components that drive the rest. Narrow the market, narrow the business offering, and shorten the time from zero to revenue. Reduce the risk on the big questions of viability and market. Lower your valuation. Create smaller milestones for the short term. 
  2. Partner up. The most common hurdle is the credibility of experience. Investors don’t want to fund anybody’s virgin startup. If you’ve never worked with a startup, then find a partner or two who have. They don’t insist that you’ve already launched and exited successfully, but they do insist that you’ve been through a startup. Maybe you weren’t the founder, but you were there early and stayed long enough to get the idea. And experience with startup failure is way better than no startup experience. There is a catch-22 problem in startup funding: you can’t get experience if you can’t get funded, but you can’t get funded if you don’t have experience. Deal with it. 
  3. Sell Something. Nothing validates a new business like actual sales. Checks written and signed say way more than big market numbers. If you don’t have the product to sell yet, cook up a deal for pre-sales. Offer huge discounts. Put it on kickstarter if you can. Find somebody to write you a written promise of sales and contracts as soon as you’re ready. 
  4. Bootstrap it. Re-read my #1 above, on scaling down and focusing. Many a food cart ended up as a fancy restaurant. Start with the part of it most likely to fund itself. Watch your costs. Keep your day jobs a while longer. Prove it to yourself and the rest of the world by starting a subset and making it work. 
  5. Attitude adjustment: Consider my illustration above. There are more good startups than good investors. Lots of good businesses aren’t good investments. They might not need investment to grow, might not have obvious exits, and — quite common — offer great ROI for founders but not for investors. 
  6. Get a clue: Yes, this point directly contradicts #5. Paradox is part of business. While some good businesses aren’t good investments, it’s also true, and probably more often, that if nobody wants a piece of your great new startup then it isn’t all that great. Reconsider. Maybe it’s time to walk away. 
  7. Don’t blame the investors: There’s a lot of wasted emotion on this point, not to mention conspiracy theories, class warfare, whining, and what-not.  Investors aren’t good or bad, they are just looking for a good return on their money. They write checks. They get to make choices. 

If you keep getting rejected, change something. Fix what’s wrong with your deal or just do it yourself. If you give somebody value, for something they need or want enough to pay money for it, then there’s a business there. Eventually. And if you aren’t giving value and people won’t pay for it, then keep your day job. 

Tim Berry , Founder, Palo Alto Software
July 10th, 2012 3

Invested Interests

New Early Stage Financing Options for Entrepreneurs

If you are new to the entrepreneurial world of startups, you are likely confused by the terminology of seed-stage, lean startups, micro-VCs, and Super Angels. Don’t be embarrassed, since even professional investors are often confused these days by the new terms, as well as old terms used with new meanings. In any case, it’s time to look again at the options you really have.

A while back I heard a talk by Dave McClure, a long-time angel investor, who also proclaims to be one of the “new breed” of venture capitalists in Silicon Valley, as CEO of 500Startups, which is either a micro-VC seed fund, or a startup incubator, or both. He is going gangbusters, and is now targeting a $50M second round of funding. The good news is that he is all about helping early-stage startups. The hard part for entrepreneurs is figuring out what it takes to play.

Here is just a sampling of the latest terminology and lingo that I gleaned from Dave, and from some additional research on the Internet, that I think every entrepreneur should know, who may be looking for funding now, or down the road:

  • Micro-VCs. These are emerging group of professional investors (venture capitalists, ala VCs), who are investing from a fund of other people’s money, with a particular focus on seed-stage startup opportunities. Seed-stage means promising companies that don’t yet have a revenue stream, and may not yet have a proof of concept.
  • Super Angels.These are angel counterparts to VCs, who traditionally only invested their own money, but now have begun raising funds from outside investors, to do more than a few deals per year. Like most angels and micro-VCs, however, they still start with relatively small sums of money, often investing only $10,000 to $50,000 in the first increment.
  • Series-seed round. Since the economic downturn started, neither angels nor VCs have given much attention to startups without a product and a revenue stream. That was left to the realm of friends and family. In the last year, there has been a resurgence of interest, some say a bubble, by both angels and VCs, in a pre-Series A kicker to identify promising startups with seed funding, before major equity has been given away.
  • Early-stage startup.Every startup is early-stage to someone. For a startup founder, this stage is when the “big idea” has become a passion for him, but he hasn’t written anything down yet. For angel investors, early-stage means there is a good business plan and maybe a prototype, but no customer revenue. For VCs, early-stage means customer revenue is less than $10M. Thus the more precise term these days for early startups is “seed stage.”
  • Business accelerator. This term is replacing “startup incubator,” which is a facility provided by an individual, university, or local community for any new startups to congregate for almost no cost, with the hope of learning from each other. The business accelerator model is YCombinator and TechStars, who select only the best applicants, have a demanding process, provide experienced coaching/mentoring, some seed funding, with a required exit in about six months. Incremental investment may follow.
  • Lean startup. This is a concept coined (and trademarked) by Eric Ries a few years ago, primarily for software and web applications. Lean startups operate on minimal money, an open source environment, and assume multiple iterations, with customer feedback, to get it right. A popular phrase heard in this environment is “rinse and repeat.” Today, if you do well in this mode, you will get funded if and when you need it.
  • Crowd funding.The recently passed JOBS bill now allows even non-accredited investors to contribute small amounts to new startups through “crowd-sourcing” sites, like Kickstarter and Crowdtilt. While the exact rules are still being set, suggested limits for a given startup will likely be a maximum of $1M, with each investor limited to an amount equal to the lesser of $10K or 10% of their annual income.

Overall, the biggest issue for early-stage startups still is funding – how much should you expect, who provides it, and how much of your future company should you give up to get it? The trend for investors, including micro-VCs and Super Angels, is to place “lots of little bets,” ($10K to $50K) with milestones applied, which can then lead to incremental and larger funding checks.

Pundits call this the “spray and pray” approach to funding. Even though significant deal vetting and filtering is performed by the investor teams running these seed programs, in effect, they spray little bits of capital onto as many good ideas as possible, help them along, and pray some eventually strike it big.

Despite these pundits, I sense a fundamental change in the early-stage financing eco-system. With the Internet and other powerful but inexpensive business tools, the cost of development and rollout of new startups is lower than ever before, so the “big bang” theory of funding no longer makes sense. This should be a wake-up call for traditional entrepreneurs and investors alike.

Invested Interests

Startups: Is purchasing office jellyfish a good use of investor money?

If the investor thinks it is, then it is. If not, no.

While that may sound simplistic, it’s actually accurate. It is important to look at questions like this holistically. Investors are putting their money behind an entrepreneur and his/her particular vision, team, and operating skills. If the entrepreneur believes that having office jellyfish is a Good Thing for company morale and a work environment that is conducive to a more productive startup team, then either the investor believes in, and supports, that choice…or else there needs to be a heart-to-heart talk about what is appropriate and what isn’t, for a given stage of a company.

If you visit the Google complexes, or those at Bloomberg, NewsCorp or other successful leading edge ventures, you will see an absolutely extraordinary number of things that appear on the surface to be ridiculous indulgences.

Somehow, though, I don’t see Google’s investors (i.e., stockholders) descending on the company with torches and pitchforks decrying these as a waste of money. Instead, they clearly help Google to recruit and retain some of the very best employees around (just ask anyone in New York or Mountain View.)

Now, massage tables and game rooms and unlimited gourmet food might be appropriate for a company with a few billion in revenue, but your Series Seed investors would likely be a tad upset if 95% of their initial seed investment went to pay for a corporate jet. However, given a degree of common sense, there certainly are some perks or ‘frivolous’ purchases that might be appropriate for even the smallest startup, if they really do help form a cohesive team and keep the mood upbeat and competitive.

For example, at Gust every employee is issued a full complement of Nerf Guns with ammunition….which means that after-hours visitors take their lives in their hands if they arrive unarmed.

We’ve also got free snacks, free lunch and breakfast once a week, a free cappuccino machine, monthly office-massages for everyone…and a complete, high-end rock band setup (the real thing: Roland V-drums,Kurzweil keyboard, Gibson Robot Guitar, etc.), although that’s just because I’ve always wanted to be in a rock band.

But when I recently purchased an 80″ 3D big screen TV to go along with our PS3, my board only raised its collective eyebrows a couple of millimeters, because the $4K cost, relative to our 30 person insanely-hardworking staff, didn’t seem all that much out of proportion (besides, it is great for presentations!)

So, you need to think carefully about your prospective office jellyfish, and if you aren’t immediately comfortable with whatever answer you come up with, go ahead and broach it with your investors to ask the question, and see whether your current funding/traction stage warrants spending +/- $3K on gelatinous invertebrates.

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

Industry Experts

Copywrong Again: Founding the Next Pinterest or Napster?

As I wrote in Part I of this post, many of the most creative and disruptive startup businesses in recent years have involved the use of intellectual property in innovative, non-traditional ways that defy easy categorization and stretch the boundaries of concepts such as the fair use doctrine in copyright. When presented with a product or service in development, we often have to admit that there is no clear precedent and look for the best analogous situation to assess legal risk.  Is Instapaper like collecting press clippings?  (If so, do you have to buy a copy of each paper first?)  Is pinning a photo or article on Pinterest more akin to showing someone an article in a magazine you’ve bought or actually making and handing them a copy?  Does using a friend’s name or photo in a Facebook “Sponsored Story” (e.g., “David S. Rose likes Gust. Click thumbs up to Like it too”) more closely resemble a personal recommendation by that friend to buy the product, or plastering the friend’s photo on the product packaging in stores?

Read more

Antone Johnson , Founding Principal, Bottom Line Law Group
July 3rd, 2012 4

Invested Interests

Make Sure Your Startup Domain is Investor Friendly

We are talking about angel investors here, meaning people who invest their own money in early-stage startups for a share of the equity. These people are highly focused on investment areas they know, which have a large opportunity for growth, revenue projection of $20M or more in five years, and a high return that can be realized via an exit within five years.

Generally, the same criteria applies to venture capital investors, although they invest other people’s money, at a later stage, in larger amounts. Both are excited by innovative new products and services, and neither is normally interested in deals in the following domains: Read more