Capital Factory 2010-apply now

Last year, I participated in the first-ever Capital Factory “summer” for start-ups here in Austin, Texas.

SpareFoot was one of the 5 companies that participated.  And out of that experience, SpareFoot received Series A investment from Silverton Partners and Maples Investments and is executing well today. Based on that alone, Capital Factory 1.0 was a huge success. Beyond Sparefoot, I worked with folks at Famigo and other companies that continue to make good progress…but let’s not look backwards, because:

Capital Factory 2.0 registration is upon us!

Capital Factory is looking for passionate technology entrepreneurs that we can accelerate towards success. You can just have an idea on a napkin or you could have a working product with your first paying customers. The mentors in the program (and there are some great new mentors as well) have started from scratch and found their market fit and they have also scaled their businesses and even taken a few public.  ACT NOW!

Only 2 weeks left to apply!

Confusing VC fund raising stats

In the past, I’ve been tracking VC fund raising quarter-over-quarter during 2009.  In my last post on the subject, after the numbers for Q3 2009 were released by the NVCA, I predicted that less that $10b total would be raised for the full year.

now, curiously, the numbers for past quarters have changed. maybe i’m missing something; if so, somebody please point out where I’m confused.

If you take a look at the numbers in this NVCA report for Q3, the first three quarters look like this:

Q1′ 09: $4.8b

2Q’09: $1.97b

3Q’09: $1.6b

As of Q3 2009, the total for the year was right at $8.37 billion across 74 funds.

Then, in the most recent release that you can find here, the numbers have changed to the following:

Q1’09:  $5.2b

2Q’09: $4.1b

3Q’09: $2.1b

4Q’09: $3.8b

Total for 2009: $15.2 billion across 120 funds (and over $10b ahead of Q4)

which, of course, makes my prediction back in Q3 that the entire year may only yield $10b look pretty silly.   …the only thing I can gather is that better, more accurate numbers came into the NVCA.org system during Q4.  Seems like the NVCA would want to talk a bit more about why those numbers changed.  If I figure anything out, I’ll post it.

New investor pitch deck post: any requests?

I’m now in the process of completely updating this post for 2010. I already have great new material…BUT I would really like to hear if there are any questions or requests for the updated version while I’m at it. Please comment here.

Slow Capital and Capitally-Disciplined Start-ups PART 2

NOTE: I just changed themes; if you like the blog, please subscribe over there to the right, near the top. Thanks.

In the last post, I framed up the relationship between the “Slow Capital” concept and the characteristics of a capitally-disciplined start-up.

This post describes the implications of each high-level characteristic of both concepts because I think they’re closely coupled the MOST IMPORTANT behavior in a start-up.

I believe that perhaps the most important behavior required of early-stage start-ups is a capacity for informed, forward progress in the face of all challenges.  How capital flows into and out of a start-up in order to drive such progress is absolutely critical in today’s start-up environment because of the risks associated with too much / too little / poorly-applied capital.  An overview of “informed progress with purpose” will be the next post after this one.

Why is progress so important?  Based on my personal experience, I firmly believe that 99% of the time in a start-up, the model and/or product you initially founded and funded the company on will change.  It may simply evolve a bit or it may not remotely resemble where you started…but it will change.  Funny things happen while hacking and slashing your start-up’s path to success.

If such fundamental change is natural, your start-up better learn, evolve, adjust, invest and execute as crisply as possible.

Let’s peel the onion a few layers on the implications of each high-level characteristic of a capitally-disciplined start-up:

It raises just enough (plus or minus some margin of error) to move to the next business / financeable milestone

  1. First, a hangover still lingers from the days when software companies could raise 7-figures before building a product and even consider how to sell that product or develop a little customer feedback. Today, raising money to pursue a “if-we-build-it-they-will-come plan” is generally un-fundable in my opinion.
  2. “just enough” means the minimum amount required but not “absolute minimum.”  So the raise could be none, $20k or $20million depending on stage and state.  Different stages and situations present different capital requirements; of course, different stages require different business proof points and validation as well.
  3. “just enough” is also helpful because it minimizes the amount of equity sold, demands better clarity in decision making & sharpens focus within start-ups.
  4. “just enough” also minimizes your investor’s capital risk; this is good in two ways: (a) it allows them to engage with (fund) your company when there is more risk than they would otherwise be comfortable at higher raises & valuations; (b) it advances the notion of an acceptable outcome for investors in a healthy, step-wise manner.  In other words, the more one raises, the larger the outcome must be in order to make a venture firm’s economics work.
  5. Finally, this characteristic is highly aligned with early-stage programs such as Y-combinator, Tech Stars, and Capital Factory.  In these cases, “just enough” capital is augmented by mentorship and business guidance that should further accelerate getting to that next business milestone.

it practices a lean-oriented, customer-development / minimum-viable-product strategy in order to make progress with purpose

  1. I’m not going to summarize each of these important concepts; please search and read the associated posts…there is a tremendous amount of quality discussion out there on these topics.
  2. In any case, in order to make informed progress with purpose, one must be INFORMED. Customer development and MVP strategies are, fundamentally, strategies for accelerating learning. The biggest challenge in making progress is clearly defining where you’re going and why.
  3. At a high level, the idea is that these practices minimize or eliminate waste.  Wasted time, wasted focus, wasted features, wasted money…all such waste increases the operational risk within start-ups.

it is focused on investing to maximize the business opportunity independent of timeframe

  1. if you accept my assertion that 99% of the time your model/product will change, it’s logical that some opportunities and strategies become apparent only as a consequence of execution over time.
  2. You might have to find, open and walk through one door before the door to your huge opportunity becomes apparent.
  3. This sort of process takes time…years, in many cases.

I think the notion of a start-up having capital discipline goes hand-in-hand with the notion of Slow Capital.  According to Fred Wilson, Slow Capital…

1. doesn’t rush to conclusions and doesn’t expect entrepreneurs to do so either

  1. This is an interesting statement because, in general, “delay” is the friend of the investor and the enemy of the start-up.
  2. Let’s not call it “delay” because that sounds negative; let’s call it “not rushing.”  “Not rushing” allows time for other cards to be turned over: is the start-up continuing to execute well?  How is the competition doing?  Are other investors interested in this start-up?  Can the start-up stretch their existing capital if necessary?  Not rushing allows more time to answer these questions and better inform the assessment of risk relative to a start-up.
  3. All things being equal, entrepreneurs would prefer not to rush either.  That said, in the vast majority of cases, not rushing is NOT an option: gotta pay the rent, gotta beat that competition, gotta finish that feature and get it tested and deployed.  I’ve never known a successful entrepreneur that doesn’t feel like their hair is on fire and if THAT THING doesn’t happen in the next 30 seconds the world may well end. Frankly, I want the entrepreneurs that I invest in to feel that sense of urgency.

2. flows into a company based on the company’s needs, not the investor’s needs

  1. a company’s capital requirements change over time as the model and product are proven out and the go-to-market strategy is fully understood.  Of course, the best time to add significant capital is when a start-up can demonstrate that capital is basically the only thing gating scale and growth; getting to this point should take much less capital than scaling for growth going forward.
  2. From the previous post on this topic:  What sort of needs do investors have to PUT money into a start-up?

VC firms need to return to their investors all the money they raised in the fund plus a significant margin above that.  Therefore, if your VC is investing out of a large fund, putting $3m into a company and getting $30m out (a truly great 10x return) probably doesn’t constitute a drop in the bucket relative to what they need to return to their limited partners.  Therefore, firms with large funds really “need” to put at least $10m-$20m into that same company and hope for at least a $100m-$200m exit in order to have a chance at a “good” return over the life of the fund.

3. starts small and grows with the company as it grows

  1. this point is very related to point #2 because capital requirements should scale over time as good execution illuminates the areas and timing where investment positively impacts the business.
  2. “slow capital” is (certainly should be) “risk-adjusted capital” because it allows investors to fund your company earlier in its life than otherwise — when there is more risk than they would typically take at higher raises & valuations
  3. If the investor continues to flow money into a start-up as it executes, increases it’s valuation, and raises money from other investors…then they should own more at a lower cost because of the risk they took by getting in earlier.
  4. Finally, while I really like this concept, it’s hard to do when there is significant competition deals. Why? Because increasing the valuation and size of funding are the weapons that firms use to fight such competitive battles.

4. has no set timetable for getting liquid: slow capital is patient capital

  1. The #4 characteristic above says it all.  This is a very entrepreneurially friendly characteristic of Slow Capital; however, I believe that it has an implied qualifier of making “informed progress” (next post) along the way.  I have yet to see (or be) a patient investor who is faced with bad execution within one of their companies.

5. takes the time to understand the company and the people who make it up

  1. clearly, this goal of this characteristic isn’t to create a warm, fuzzy, “let’s go have some hot chocolate together” sort of moments.  Although, I suppose that could be a consequence.
  2. I believe the intent of this characteristic is to understand the more qualitative elements of what makes a company successful. Revenue, expenses, cost of goods sold, conversation rates are all substantially quantitative. The culture, people, and interpersonal dynamics of a start-up are far more qualitative but still critical (perhaps the most critical) accelerators or detractors of good execution.

I also mentioned that I thought a couple of concepts were left out of the Slow Capital Discussion… Slow Capital ALSO…

6. comes with stage-appropriate strategic and operational assistance

  1. it’s hard to do this well if you’ve never been an operator.
  2. Stage-appropriate means more assistance for early-stage companies and less as the company grows…but in all cases, such assistance must have substance and follow-through in order to cut through the “we’re smart money” cliché that is carelessly thrown out time and again.
  3. If nothing else, the perspective and best practices from investors whose job it is to look across industries, companies and strategies can provide unique insight when coupled with a start-up’s view from “in the trenches” of their day-to-day business.
  4. While this can be a slippery slope if the investor does not spend enough time to fully understand the business dynamics for companies they’re trying to assist, this sort of involvement can ensure there is lock-step agreement on the company’s execution, business requirements and capital needs (see characteristic #2).

7. …I’m sure there is another characteristic…more soon.


Third Quarter VC fundraising level falls to new low

The third quarter of 2009 represents a new low in the on-going analysis of VC fund raising. Below is the chart; numbers on right are in MILLIONS of dollars.

VC Fund Raising for 3Q 2009

VC Fund Raising for 3Q 2009

In Q3 of this year, only 17 funds raised capital compared to 27 in Q2 and 50 different funds in Q1.  The total amount raised was $1.5 billion down from $1.96 billion in Q2, bringing the total for the year to $7.5 billion.  In short, that means we hit a level that “represents the smallest number of venture funds raising money in a single quarter since the third quarter of 1994 when 17 funds were also raised and the lowest level of dollars committed since the first quarter of 2003 when $938 million was raised.”

Now, the biggest question is how much the (apparently, at least at the time of this writing) rebounding economy will positively affect Q4 fund raising. The IPO market window is open for especially healthy companies and M&A activity has picked up.  This doesn’t mean that valuations in either case are back to normal levels and therefore a “wait and see” attitude toward this asset class is very possible.  This sort of stuff is no fun unless someone goes out on a limb…so here we go:  I predict that Q4 will come in right at $2.0 billion and, therefore, the total funds raised by venture capitalists in 2009 will come in just under $10b.

To restate:  the cost of capital will remain high for start-ups; and these three trends are still valid:

  1. To the LPs, the venture capital asset class is going to largely show negative returns based on the commonly used 10-year rolling average calculation
  2. Any exit via IPOs or M&A will be at fundamentally lower levels…consistency and predictability is highly unlikely
  3. while probably improved, significant liquidity concerns remain in the limited partner world of university endowments and public pension funds

According to the NVCA press release:

“Anecdotally we are hearing that fund raising activity is accelerating as more firms that were waiting for economic recovery are beginning to formally seek commitments,” said Mark Heesen, president of the NVCA. “The reality, however, is that many limited partners are still determining their long term strategies in wake of the past year’s financial crisis and that slows the process down considerably. We expect commitment levels to remain modest for the remainder of 2009 with gradual increases beginning in 2010.”

Pitch Deck: Funding Ask Slide

This post has been updated and can be found here.

The post covers the one of the final 3 slides: Funding status/ask.  The original outline is here: THIS is the OUTLINE.

Slide 10: Funding Status and Ask Slide

Funding Status and Ask

Funding Status and Ask

The funding ask slide requires a bit of finesse as you are starting a set of discussions that could turn into negotiations if your potential investor turns into your actual investor.

In this slide, a little back ground is very helpful.  Make sure you let your audience know who you have raised money from in the past and at what valuation. This is not “secret” information; be open and transparent.  If you seed funded your company, that’s a good story, make sure you talk about it.  You should also talk about the structure of any prior formal investment by a third party: who, how much, when, format (common, preferred, convertible debt, etc).

It’s important to get right to the punch line of this slide; You MUST be prepared to address the following (have data, be thoughtful, use a clear explanation):

  1. how much money would you like to raise?
  2. why that amount?   (what will it be spent on? how long will it last?  what value will you create in your business using it?)
  3. could you do what you need to do with less?   what might you do with more?
  4. are you actively working with anyone else on this round?

When it comes to timing, it’s important be realistic. If this is the first time you have met with this firm, it’s typically just the beginning of a process that will almost certainly involve multiple meetings over weeks if not months. For larger VC firms, you will not receive a term sheet until you’ve run the gauntlet of their Monday partner’s meeting…if you’re dealing with a top 25% firm, you’re not even close to “done” until you’ve got the Monday invite.  Smaller firms are able to be much more dynamic and efficient…however, that doesn’t guarantee that they will.

If the conversation is going remotely well, you’re likely to be asked about your valuation expectations.  If you have raised money at a particular valuation in the past, that is your starting point…but in this current macro-economic environment previous valuations do not guarantee ANYTHING.  If you have a number in mind that is based on data that is realistic – don’t be shy – flop it out there.   It’s important to understand enough about the VC business to know that investors tend to model their business on investment exits, cash returned to their limiteds…and consequently ownership percentages in their portfolio companies at the time of exit.  Given this, it’s reasonable to approach a valuation discussion by starting with “how much of the company you’re comfortable selling in this round of financing.”  Fixing the amount raised and how much you’re comfortable selling implies a valuation.  Raising $300k while targeting selling 25% of your company imples a valuation of $1.2m.  This is a useful way to have a valuation discussion because if the round size happens to go up (not uncommon) as the round & syndicate come together, you can at least make an argument for raising the valuation. No guarantee it will work.

Pitch Deck: Financial Details

This post has been updated and can be found here.

The post covers slide #9, Financial Details, out of 12 total slides (11 + thank you slide) in THIS outline of a minimal investor pitch deck.

Slide 9: Financial Details

Financial Details

Financial Details

Independent of the stage of your company, communicating simple and clear financial details is critical to an investor’s understanding of the current state of your business. What they care about is very simple:

  1. current revenue and expense trends,
  2. projections for the same going forward,
  3. current equity situation (who owns what, option pool, near-term option usage), and
  4. current cash position.

…Cover these these items clearly and you’ll be answering their questions before they get asked.

For early stage companies, I believe that a “one quarter ago, current quarter, and 4-quarters-out” view presents a reasonably complete set of financial information.  With such a time frame, you’ll show a bit of history, where you are today, and a reasonable guess  at what is going to happen in the next year.  I think a simple auto-generated excel graph help quickly communicate the ramp in both expenses and revenue.

If the company is really early stage and doesn’t have revenue or limited expense detail, it’s still far better to say something is explicitly zero (or unknown) than not mention missing/needing important data.

This example chart is a bit busy as it combines both the graph as well as a screen-grab from the company’s financial model spreadsheet.  If you have a longer operating history or feel like you need to communicate more detail, it makes sense to break this into two slides: a graph (the reader’s digest version) and the spreadsheet detail.

Data that investors will always want to clearly understand include: what is your current and future headcount (this equates to your burn rate as headcount is almost always the biggest expense)?   what is your current monthy/quarterly burn rate and how does that ramp over time?   what is your current revenue and how does that ramp over time?  How quickly are you approaching a cash-flow breakeven point?  What’s your revenue run-rate 12 months from now?  What’s the net loss / gain over the same period?