Rise Across Texas Challenge – Day 2

Day 2 was the first day of riding; the group went from Orange, Texas at the Texas-Louisiana border to Kountze, Texas.  Some of the early circles near Orange were due to the kick-off ceremony.  We had beautiful weather and the wind only kicked up towards the end of the ride.  I’ve got a feeling these were probably the best conditions we’ll see during the entire trip…but we’ll see.

Stats for today are as follows:

59.9 miles in about 4 hours (the chart below says 4:53:30 because of starting and stopping the RunKeeper iPhone app).  As a side note, I like RunKeeper – if you bike or run – it’s highly recommended…although, it helps the iPhone eat batteries so I’m trying a variety of things to prolong the battery life.

RunKeeper says that, in total, we climbed 1900 feet; the “Trek guide” suggests that it’s closer to 1000 feet of rise and drop.  Finally, it looks like about 2700 calories were burned.  Not sure if that’s accurate, but I’m starved at the moment.  Here’s the route marked with 10-mile increment on top of Google Maps from RunKeeper:

Rick Perry, The Governor of Texas, joined us for the entire ride today (see picture below).  Two thoughts:

  1. Lesson learned:  whenever possible, ride with the Governor…the police escort rocks
  2. The Gov can ride for real (wish I could say the same for me).  He led the pack for good bit and finished strong.

The people were great – especially the crowd in Orange; the ride was not as hard as I was fearing…but tomorrow is 83 miles compared to today’s 59 as we head off to Conroe.

So far, the two most common things to see along the ride are road kill (all variety) and Chihuahua’s (alive & in yards; no, I don’t know why).  For day 2: One flat tire; no injuries; and a Super 8 Motel in Kountze…all good.

A bike ride across Texas

For the next few days, this blog will be focused on a bike ride across Texas.  Myself, Al Koehler, Jim Crow and a bunch of other folks will be biking across Texas for charity. In particular, for the Rise School / Austin.

In particular, The Rise Across Texas Challenge is a bike ride that will cross the state from the eastern border to the west.  Starting tomorrow morning (March 6th), approximately fifty cyclists will cover 850 Texas miles from Orange to Presidio, Texas.   I’m in Orange right now doing this blog post.

Over the next few days, I’ll document the route and details of each day’s ride.  Hopefully, using the RunKeeper iPhone app, I’ll be able to document each segment in details.

For now, here’s the main bus:

While the next set of posts will all be basic information, here’s the background on the ride:

The non-profit Rise Schools provide the highest quality early childhood education services to children ages 18 months to six years with special needs focusing on children with Downs Syndrome.   The Rise Across Texas Challenge will push its riders to extremes for a cause that’s worth the sore muscles: to raise money for the Rise Schools of Texas! Our goal for this ride is to raise $5,000,000 of which $3,000,000 will come to Rise Austin to kick off our Capital Campaign for a permanent home.

If you would like to learn more about the Rise Across Texas Challenge click here for a video message from Mack Brown and Lance Armstrong:

http://riseacrosstexas.org/site/PageServer?pagename=HOME_Rise_Across_Texas

To Donate: http://bit.ly/RiseRide

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.


The Early 2010 agenda for blog posts

coming soon….

– finish discussion of slow capital and capitally-disciplined start-ups
– driving progress with purpose … the start-up mantra
– an updated and revised example funding deck & discussion for 2010
– an on-going, real-world analysis of my start-up project (all year)
– more on the enterprise activity stream

Slow Capital and Capitally-Disciplined Start-ups

I was recently reading through Seth Godin’s new free ebook (you should get it … it’s 90% great stuff) and saw Fred Wilson’s page on Slow Capital.  I remember reading his original blog post on slow capital and thinking it was a bit motherhood-and-apple-pie at the time… but seeing him dedicate his one page in Seth’s big-ideas book to this concept made me consider it a bit more.

I like the notion of slow capital.  I think it’s the other side of the coin of agile / lean, capitally-disciplined start-ups.

updated 1-04-10 a quick side note:  Increasingly, I’m not a fan of the term of “capitally efficient” applied to start-ups because I think the notion of efficiency is closely coupled to the concept of “minimal” and I think there are plenty of situations that start-ups need to raise / spend / invest more capital if they are doing it in a purposeful, disciplined way. For example, a sudden, threatening appearance of direct competition necessitating an increased investment in development.  And, remember that in almost every case, people (head count) will be your largest expense within a start-up; adding employees too early is very inefficient.

In particular, I think there is a direct relationship between the stage and the need for capital efficiency. To be clear, the younger the start-up the more benefit there is to spending as little as possible; so, in this case, the term “efficiency” makes sense.  As a start-up matures and begins to put good execution and product/model experience successfully behind it, “capital discipline” is a more appropriate notion.

A start-up has capital discipline when:

  1. it raises just enough capital (plus or minus some margin of error) to move the business to the next (financeable) milestone
  2. it practices a lean-orientedcustomer-development / minimum-viable-product strategy in order to make informed, measured progress
  3. it invests to maximize the business opportunity independent of timeframe

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
  2. flows into a company based on the company’s needs, not the investor’s needs
  3. starts small and grows with the company as it grows
  4. has no set timetable for getting liquid: slow capital is patient capital
  5. takes the time to understand the company and the people who make it up

This style of investment is considerably more time-and-place appropriate today than the big first rounds and if-we-build-it-they-will-come operating plans of the late 90’s and early 2000’s.  Furthermore, I like that there’s a rich subtext to each of Fred’s statements that describe Slow Capital.

Take #2…what does this even mean? What sort of needs do investors have to PUT money into a start-up?

Here’s a swag at a bit of context to this statement: Typically, when VC firms raise a fund, management fees are typically 2% annually.  For example, if you have a $900m fund, that’s $18m per year in management fees (over a 10-year fund) that must be PAID BACK to the limited partners according to a disbursement plan.  To avoid a discussion of internal rate of return (IRR), imagine that the firm wants to return AT LEAST 30% on the fund.  That means, for $900m invested, at least $1.35 billion should go back to the limiteds over ten years.

So what?  Well, if you’re shooting for returns of that size, putting $3m into a company and getting $30m out (a truly great 10x return) doesn’t constitute a drop in the bucket relative to what you need to return to your limited partners.  Therefore, folks running very 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 returning the $1.35b over the life of the fund in our example.

THAT is an example of “investor’s needs” – and it may or may not have ANYthing to do with the needs of the start-up…and in most cases, results in something that adds a significant amount of risk:  over-funding the company.  And while it takes two to do the funding tango (both start-up and VC saying ‘yes’), it’s generally understood that an over-funded company is more capable of funding / accommodating sloppy execution instead of being required to choose a single path of focus and execution.

I also think there are a couple of concepts missing from the notion of Slow Capital.

More on this soon…