In a recent post “A VC” Fred Wilson explains How To Calculate A Return On Investment – because he has seen multiple cases of financial projections from entrepreneurs who don’t quite understand ROI. As Fred points out “You don’t need to get a finance MBA to be able to do this kind of thing.” Read his post, and you’ll be one of those who gets it.
Archive for the 'Venture capital' Category
At OTBC, we meet with a lot of entrepreneurs who want to raise venture capital to fund their idea. If they haven’t raised venture capital before, they tend to underestimate how difficult it is and how long it takes. One way to increase the odds of getting funded is to understand what VCs look for in an entrepreneur. (Of course, it also takes an investible business concept and enough headway to reduce the risk – but that’s a different story.)
Mark Suster, a partner with venture fund GRP Partners, made 3 posts to cover his list of “10 skills I look for before writing a check”. He cheated a little, and actually listed 12. Still, it’s a good list of traits that are important for a start-up entrepreneur. You can find the list in these three posts:
The short version is:
- Tenacity
- Street smarts
- Ability to pivot
- Resiliency
- Inspiration
- Perspiration
- Appetite for risk
- Detail orientation
- Competitiveness
- Decisiveness
- Domain Experience
- Integrity
It’s hard to argue with the list. The only thing that surprised me is that Integrity came as almost an afterthought, at the end of the list. I know investors who would put that at the top. But all in all, it’s good food for thought. If you’re launching a company, I suggest you read all three of Mark’s posts.
You may recognize the George Bernard Shaw quote. The rest of it is: the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.
From WSJ.com: Venture Capital Dispatch Turning Unreasonable Ideas Into Reality
It started with 284 unreasonable ideas. Those were whittled down to 42 unreasonable ideas. In the end, 25 such ideas may become a reality thanks to the Unreasonable Institute – a 10-week incubator for entrepreneurs who aim to make a difference in society.
The project of Rafael Smith, whose idea is to produce emergency shelters that provide humane living conditions to refugees. Smith is one of 42 finalists for the Unreasonable Institute’s 10-week incubator program.
The incubator’s name, which carries an adjective that might usually turn investors away, is inspired by the George Bernard Shaw quote, ‘The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.’
The Unreasonable Institute will unite 25 entrepreneurs from around the world to attend an intensive 10-week summer training program. Among the 42 finalists, announced today, are a computer engineer from Brazil creating devices that will make blind people more marketable for jobs and an MIT graduate from Pakistan working to create heat saving insulation for shanty town homes, thus reducing indoor air pollution and money spent on heating for their poor inhabitants.
At the end of the 10 weeks, the entrepreneurs are connected with socially responsible venture firms that might be interested in investing. One firm, Atlanta-based Gray Ghost Ventures, which invests in business that improve low-income communities, is setting aside $150,000 for a fund with a twist. The 25 entrepreneurs will decide which companies, up to four of them, will get the money from the “Unreasonable Village Fund.”,
Imagine that – the entrepreneurs decide which, out of 25, will receive an investment from Gray Ghost Ventures. OK, I suppose that seems like an appropriately liberal approach given the social-good orientation of the Unreasonable Institute’s mission.
But it’s interesting food for thought. Would a group of entrepreneurs make better investment decisions than a VC firm or angel group? Would 25 entrepreneurs choose to “vote” against themselves, if there could be only 4 winners? And would entrepreneurs make good investment decisions? Hard to say – group dynamics sometimes lead to surprisingly rational decision-making.
But what am I thinking – entrepreneurs making investment decisions for angel groups and professional venture capitalists? The tail wagging the dog? That’s clearly unreasonable.
Here are some of the posts I ran across this weekend that I thought other entrepreneurs might find interesting:
Startup Operations
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Separating Your Personal and Business Finances – And Keeping them Separate
Legal
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Top 10 reasons why entrepreneurs hate lawyers
Bram Cohen: “Lawyers can’t tell you you can’t do something”
We need an independent invention defense to minimize the damage of aggressive patent trolls
Venture Capital
Entrepreneurship
I watched the video of Roger McNamee’s presentation for the Aug. 21, 2009 Tech Alliance Tech Talk today. Roger has many years of experience investing in tech businesses. Here are some of his comments on web start-ups that target consumers:
(if you have) a web business, and you’ve got cash flow in a web business, … do not take money from anybody unless you really need it. The real problem in a web business particularly consumer ones is that you have to build the audience before it makes any sense to try to build the revenues
When somebody comes to me with an early stage thing and there’s a business model in it, I say to them “time out”. If you’re consumer focused I don’t think you can do it that way. The ad market is not good enough. It just won’t support you. So you’re better off doing what we’re doing in music, which is give it away for a while, build the audience. Why did I tell you that (music) story? Because that’s how you build consumer web businesses today.
Putting the comment into context, I don’t think Roger is saying that he doesn’t believe in business models for web companies – but he does believe that it takes consumer focused web companies 3 years or more to get enough of an audience to be in a position of implementing a revenue strategy. And expecting much revenue from advertising is not very realistic. That’s certainly good food for thought for any entrepreneur who plans to start a consumer web business. If that sounds like you, it’s worth watching the entire video. It’s pretty long (over an hour and a half) but there is some good content.
Roger also had some good advice for entrepreneurs who are raising money:
The guy with the money doesn’t care how good your opportunity is. The guy with the money wants to see that you understand all the risks and that you have them contained or eliminated. So in the battle of fear and greed, if you’re an entrepreneur raising money, eliminate the fear. Whatever is left over will push you over the line.
To say the investor doesn’t care about how good the opportunity is goes a bit far — but the point on understanding and addressing risk is spot on.
According to Venture Beat, VCs raised the fewest funds in Q2 since 1996:
VCs raised 25 funds for a total of $1.7 billion. That’s the smallest amount of money raised in any quarter since 2003, and the lowest number of funds since 1996. It even represents a major decline compared to the first three months of the year, when firms raised $4.6 billion for 49 funds.
And VentureBeat also reported that VCs invested $3.7 billion in startups in Q2 - $2 billion less than VCs raised. There have been posts from VCs in the past few months talking about he “Venture Capital Math Problem” (one noteable example is Fred Wilson’s post) basically arguing that there’s more money in the VC system than can be productively used.
Here are the quarterly VC fund raising numbers since Q2 2007 from Thomson Reuters and the National Venture Capital Association:
As Adeo Ressi points out, a large portion of the fund raising in the first half of 2009 was done by new funds, many of them managed by entrepreneurs looking to bring about change, such as Marc Andreesen and Ben Horowitz. Still, it looks like the market is beginning to adjust to the new VC math, and that could make for an even tougher period of fund raising for start-ups.
VC investments in startups in the U.S. stabilized in the second quarter at $3.7 billion, according to the latest MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. As TechCrunch put it:
The rebound, if you want to call it that, hasn’t hit the Internet sector yet. Internet deals brought in only $524 million in the quarter, down from $593 million the quarter before and $1.7 billion a year ago. Clean tech isn’t doing so hot either, with only $274 million invested during the second quarter compared to $911 million a year ago. Most of the action came from biotech and medical devices, which saw bigger jumps in funding during the quarter to $88 million and $628 million, respectively.
Remember, this is only one source of data (most of it from Thomson Reuters). We actually measured nearly twice the dollar amount of venture deals during the quarter on CrunchBase, which we’ll share more fully soon.
You can view a graph of quarterly VC investments in the U.S. (or for any particular region) since Q1 of 1995 at the MoneyTree site.
As reported last week in the New Your Times , a University of Maryland business school study concludes that:
GO ahead and write that 50-page business plan about your fledgling venture if it helps you to focus. Just do not bother showing it to venture capitalists, because it will do nothing to improve your chances of getting financing.
Yes, it’s true, many investors will not read a business plan. And a full business plan is usually not a very compelling way to initially get an investor’s attention and generate excitement about your business. And let’s face it, it takes interest and excitement to motivate someone to read a business plan.
But as suggested in the article, doing “business planning” is important. I like the way Pamela Slim, author of Escape from Cube Nation, put it in an interview with Guy Kawasaki :
You don’t have to have a complex business plan with thirteen attachments and spreadsheets, but you do need to engage in business planning. Know the kinds of problems you are trying to solve, and what value solving them would bring to your customers. Get clear on resources needed to bring your business to life. Start by guessing how many widgets you plan to sell, so at least you have a good laugh the next month when you look at actual sales. But as business planning guru Tim Berry told me about projections, they are only guesses for a month. After that, you have real data to compare. So move quickly, test often, fail fast, and discuss and document your assumptions. If you keep everything in your head, you will limit your creativity, and in the long run limit your growth.
So yes, planning is important. Writing it down is important. But filling in a 50 page outline of a business plan so you can put a check in that box – that, by itself, doesn’t necessarily do you much good!
In his “Pioneers get arrows in their backs” post this past week, Ed Sim (Dawntreader Ventures) states:
…raising too much money too early can be harmful as it puts huge expectations on a company before it has proven itself
That’s advice a lot of pre-bust companies should have taken, and good advice for companies today. Yes, it’s tough to raise money today, but when you do, it’s worth making sure you take one step at a time, and don’t close so much money in the first round that you set expectations that will be tough to deliver in an unpredictable, emerging market. It’s more likely that you’ll have to stretch whatever you raise to last longer than you’d planned – because most everything (customer adoption included) takes longer than you’d expect.
In a post this week , communications consultant Matt Eventoff talks about two “killer apps” (i.e., killer problems) that afflict startup pitches:
- No central (clear) message. Too much complexity
- No practice or preparation, resulting in a distractingly bad presentation
I’d have to agree that Matt’s two “killer apps” can indeed be killers. When pitching an investor, the compelling idea, your solution, and how the investor makes money must all be spelled out simply. And if you don’t practice the pitch, you’re likely to stumble through it and actually make it harder for investors to figure out just what your company does. So keep it simple, and practice, practice, practice!
