Written by Jay Turo on Tuesday, June 16, 2009
The typical wisdom regarding the appropriate financing course for startup goes as follows:
It all sounds wonderful and it is. The only problem is that it mostly a fairy tale. Here is what really happens:
New, groundbreaking research from the Ewing Merion Kauffman Foundation on Entrepreneurship shows that the #1 key for the angel investor returns in emerging technology deals is that there is never any venture capital invested in the company!
As interestingly, the data shows that when you remove a follow-on venture capital round from angel invested deals that expected returns skyrocket.
The data is somewhat inclusive as to why this is. I surmise three main reasons:
My suggestions for the angel investor looking to make money? First, look for "one and done" deals - companies that need just one round of outside capital to get them to positive cash flow. Second, look for companies that have short and realistic liquidity (exit, IPO) timelines. And third, don’t get star-struck by big VC interest in your deal. It can often be a double-edged and very sharp sword.
Written by Dave Lavinsky on Tuesday, June 16, 2009
Every day I hear pitches from entrepreneurs about the great new product or company they are launching (or want to launch).
Written by Jay Turo on Wednesday, June 10, 2009
With the Dow Jones up more than 35% from its early March lows of 6,440, the investing mood has undergone a 180 degree turn for the better. How does this rebound affect the angel investing returns?
Here are the negatives and the positives:
But we are getting our groove back. Consumer and business confidence have skyrocketed since March. Bank lending is up. Business capital expenditures are increasing. The real estate market, in most parts of the country, has at least stabilized (and in many places, greatly rebounded). Jobless claims are down. Most importantly, corporate profit forecasts are up.
All of this drives deal-making. It drives big companies to buy small companies to gain access to their people and their technology. It drives venture capitalists to agree to bridge financings. It drives entrepreneurs to get back to pushing the envelope with their growth plans. And all of this positive, forward-looking acting and thinking drives angel investing returns. Entrepreneurs grow their businesses faster, they exit faster, and investors turn their money faster and at great multiples.
All these factors have turned 180 degrees since March. And for those that love America and its entrepreneurial spirit, not a moment too soon.
Written by Jay Turo on Wednesday, June 3, 2009
The next big private equity investment idea is the “Early Exit.” The best articulation of it comes from Basil Peters, a serial technology entrepreneur, co-Founder of Nexus Engineering, former Canada Entrepreneur of the Year, and Managing Partner at 3 venture capital funds – Fundamental Technologies I and II and the BC Advantage Funds. His blog is one of the best resources on technology investing out there.
Aptly to the point, Basil is the author of a great new book – “Early Exits: Exit Strategies for Entrepreneurs and Angel Investors.” His core thesis is that successful private equity investing is now driven by quickly getting to the smaller investment exit. Or, as he says it, "Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan for an early exit to a large company in just a few years for under $30 million."
I love this strategy because it is realistically attainable for the individual investor. Here's why:
You, Mr. or Ms. Main Street Investor, are NOT getting a piece of the next big IPO: The 2 best known venture capital funds –Sequoia Capital and Kleiner Perkins - because of their reputations and massive bankrolls – will continue to get the lion’s share of the deals with rockstar IPO potential. Try these names on for size – Electronic Arts, Apple, Google, NVIDIA, Rackspace, Yahoo!, Paypal, Amazon.com, America Online, Intuit, Macromedia, Netscape, Sun Microsystems.
They were all Sequoia and/or Kleiner investments that became mega-successful IPOs. To give a feel for the power of their investment model, estimates are that Kleiner’s investment in Amazon scored returns of 55,000%!
YOUR big problem – your friendly neighborhood stockbroker (if they exist anymore) isn’t getting you in on any of these deals anytime soon. And if you don’t have a $100 million bankroll and the very right connections to become a Kleiner or Sequoia LP, you’re not joining their club.
Hit’em Where They Ain't: The size of most modern venture capital funds has increased, with the average sized fund now having more than $160 million under management. As a result, the vast majority of professional investors simply can’t and won’t invest in smaller deals. The new VC model has, for better or for worse, become “Go big or go home.” As such, competition for smaller deals is much less and the deal pricing on them far more favorable.
Small Deals Rock: You don’t need a lot of money anymore to build a technology startup – not with outsourcing, viral marketing, and the Software as a Service (SaaS) revolution. And if your business isn’t cash flow positive REAL FAST, you probably don’t have a very good business.
So the new technology investment model is to place small amounts (under $1 million) into companies that a) develop intellectual property and compete in markets with lots of active strategic acquirers (think Internet, software, biotechnology, digital media, and energy) and b) have management with the mindset and track records to ramp-up and exit FAST and at very attractive but not pie-in-the sky multiples.
Not a game that big private equity or venture capitalists are interested in playing because it is just too hard to put large amounts of money to work in such a fragmented marketplace.
But if done right, an EXTREMELY lucrative one for thoughtful entrepreneurs and the investors that back them.
Written by Dave Lavinsky on Tuesday, June 2, 2009
Recently, I had the great fortune of interviewing Mark DiPaola, an extremely accomplished entrepreneur.
As the founder of Vantage Media Corp., Mark raised a $70 million Series A financing, which is still on record as one of the largest Series A raises in history. And in 2007, his company generated $68 million in revenues.
As president of D3 Ventures, Mark also functions as an investor.
As a person with such success on both sides of the table - investing in growing businesses, and actually founding and growing businesses himself, I couldn't wait to interview him about entrepreneurship and raising capital.
During the interview, Mark went into great detail as he recounted his own experiences on raising capital for Vantage Media. One thing he emphasized was how important it is to know your business inside and out, and how this knowledge impacts not only your ability to grow your business, but also to achieve sales breakthroughs and get the attention of investors.
Mark revealed one website for job postings which helped him assemble a 35 -person team that brought in $40 million/year in revenue -- and it's not the website you might think! We discussed hiring strategies, the number one factor to look for in job candidates, and when it's time to bring in a highly-experienced management team.
Regarding his role as an angel investor, Mark shared the qualities he looks for in a company before making an angel investment, and why it's important that entrepreneurs are referred to investors.
Growthink University members can listen to the interview here:
For those who have not yet joined, you can listen to the first five minutes by clicking the blue triangle below:
Written by Jay Turo on Thursday, May 28, 2009
In my role as the CEO of Growthink, I get asked variants of the same questions a lot, namely: "What do you think about this economy?” “Do you see things turning around?” “Are there any deals getting done out there?” I answer these questions based on a number of factors:
What does this all sum up to? The Beatles say it much better than I ever could:
Written by Dave Lavinsky on Tuesday, May 26, 2009
It is common knowledge that companies need business plans.
Written by Dave Lavinsky on Thursday, May 21, 2009
I hope you're not a Susan Boyle fan. Because I have a major bone to pick with her. If you don't know who Susan Boyle is, she's the 48-year old British woman who gained international fame upon singing on the reality TV show "Britain's Got Talent" in April 2009.
So why am I so mad at her?
Because for 48 years she kept her talent to herself. She was too afraid to take a shot. To use her natural abilities and training to achieve real success.
I say "how dare she do this!" Is this fair to the millions, if not billions, of other people in the world who don't have this talent? Or who live in places where they have no ability to use their talent? And is this fair to the billions of others worldwide who have missed out on hearing her beautiful voice for the past four decades?
Now what really gets under my skin is when I compare Susan Boyle to an entrepreneur, which she essentially is. How many natural entrepreneurs are out there who are letting their talent waste away? Who have tons of ideas and abilities, but are working in their same, boring jobs and not using them?
Why do I care?
Because they are failing to create wealth for themselves and their families. And worse, they are killing our economy. Because entrepreneurs like them are supposed to be creating great companies- companies which provide jobs, great products and services for the rest of us, and a tax base that feeds our government. Yes, they are failing themselves and their countries.
So why is this happening? I think it's because they are too afraid. Like Susan Boyle was for many, many years. And unfortunately, in many cases, these entrepreneurs simply haven't gotten the kick in the pants that they needed.
Like entrepreneur Mark DiPaola who I spoke with the other day. Mark graduated from college and got a cushy job at a consulting firm. He worked there for a couple of years, and may have worked there for decades if he kept getting promoted.
But thank goodness, Mark got laid off. And then he went to work at a startup. And thank goodness, the startup failed. Because it was those two experiences which prompted Mark to start his own company.
Which he did. And which was a massive success. The company, Vantage Media, generated $68 million in revenue in 2007. In March of that year, venture capitalists and private equity firms put $70 million into the company and Mark was able to cash out and leave the company at the age of 30. And retire. And start a foundation to give back. Now that's what I call success.
Are you the next Susan Boyle? Do you have entrepreneurial talent, but are keeping it to yourself? Have you not started your own company yet? Or failed to really grow your company? Well, I'm willing to bet that you have more talent than you let on and that you could be more successful than you currently are.
And, I also know what's probably holding you back.
That's right. Most entrepreneurs start their companies or grow them properly because of money. Which is odd, since successful entrepreneurs make tons of money. But, to become a successful entrepreneur, you often have to leave your current job and current income.
To solve this problem, many entrepreneurs, like Google AdSense founder Eytan Elbaz who I spoke with the other day, raise capital BEFORE formally launching their companies. They continue to work at their current jobs and develop their business plan and raise money. And then, once the money is in their bank account, they leave their current job and dive into their ventures full time.
And you can do this too! IF you know how to raise money for your business.
So, in addition to all the information that you buy and read on marketing, operations and other business disciplines, start investing in learning how to raise money for your business. Since that is the most essential skill for a successful entrepreneur.
Written by Jay Turo on Wednesday, May 20, 2009
"Those who cannot remember the past are condemned to repeat it" - George Santayana
The financial panic of 1873, which set off a severe nationwide economic depression that lasted for 6 years, included The New York Stock Exchange closing for 10 days, 89 of the country's 364 railroads going bankrupt, and unemployment as high as 14%. During this extremely challenging time, a gentleman by the name of Thomas Edison started a company called General Electric. You may have heard of both of them.
The Great Depression of the 1930's is even scarier in statistics than in legend. Industrial production fell by 45% between 1929 and 1932. Homebuilding dropped by 80%. 1,000 of the nation's 25,000 banks failed. US GDP fell by 30%.
And during these dark days, DuPont created new products and indsutries including rayon, enamels, and cellulose film. RCA invented television. And a little company called IBM started pouring research dollars into something called the computer.
The 1970's are commonly remembered as a dark period for American finance and business - stagflation, negative stock market returns for the decade, and hits to the national psyche including Vietnam, Watergate, and the Hostage Crisis. It was also the era that 2 ambitious and visionary young men named Bill Gates and Steve Jobs got their start.
My 20 years in angel investing, small business and entrepreneurship have taught me to separate the world into two kinds of people: Those that comment and complain on how things are and those that do something about it.
Unluckily for all of us, television and the always on Internet give those that comment and complain bigger megaphones than ever to spread their false prophesies of doom. It is only human nature to be affected, depressed, and even scared by their strident negativity.
Very, very luckily for all of us, however, there always be budding Bill Gates and Steve Jobs and Thomas Edisons and Thomas J. Watsons amongst us. And where are these future shining stars devoting their prodigious energies to these days? I promise you that most of them aren't working at General Motors, nor are they drawn to politics or working in the public sector, nor to non-profits.
No, they are capitalists. They are entrepreneurs. They start and work at Internet companies, they research alternative energy technologies they discover new drugs to make us all live longer and healthier lives. They are and they discover Black Swans. They - in the words of Voltaire - make "life throb to a swifter, stronger beat."
And you know what else? They're in it for the money. They want to build companies like Pure Digital (makers of the FlipCam) did and sell out to Cisco Systems for $590 million. Or Facebook, on the verge of a public offering that will make its early investors billions. Or Integreon, whose business plan was perfected in a small Growthink conference room 10 years ago, and is now the largest legal outsourcing firm in the world (and saving a lot of folks a lot of money on their legal bills).
With apologies to Doris Day, the future is in fact ours to see. As long as little boys and girls are raised to grow up to do something great with their lives, progress will march on. Technologies will be commercialized. New industries will arise. Companies will be born and will grow and grow and grow. Fortunes will be made.
The question, of course, is what will be in it for you? Will you be on the couch with the critics? Or will you be in the game with the builders and the doers?
Written by Dave Lavinsky on Thursday, May 14, 2009
If you haven't yet launched your new business, I have some advice for you.
It's actually not my advice. As I'm a little conflicted about it. Let me explain.
The advice is to start your new business as a project. What that means is that you don't quit your day job. You don't raise capital. You don't focus 100% of your effort on it.
Rather, you work on it as much as you can in your spare time until it either becomes something, or it doesn't.
The advice comes from Bambi Francisco, the co-founder and CEO of Vator.tv who I spoke with earlier this week. It's not only her advice having founded a company, but the advice given to her by Mark Pincus.
Pincus is the serial entrepreneur who founded Tribe in 2003 and sold it to Cisco Systems in 2007, and is now the founder and CEO of Zynga, a large social gaming company. You can watch Francisco's brief but informative interview of Pincus here.
So, the point is to start your new business as a project. Obviously, this depends on your choice of business. If it's a restaurant, there's not much of a project to be had. But if it's software, for example, you can start developing it and see if you are able to start creating features that people want.
And once you can prove that the project is developing into a viable business, you create a real company for it.
This "project" concept also reared its head when I recently spoke with Eytan Elbaz, co-founder of Oingo, the company which later would be purchased by Google and renamed as Google AdSense.
Elbaz and his co-founders were developing their novel software while still holding full-time jobs. After a little while, they were able to develop a working prototype. And then, Elbaz showed it to an angel investor (who interestingly was a client of his at his current job). It was only upon the angel investor writing them a check that they decided to leave their full-time jobs and really launch the company.
So why am I conflicted about this advice? Well, there's definitely something to be said for the entrepreneur that is so passionate about their business that they're willing to fully launch it from the get go.
To leave the comfort of their current job and take all the risk. In these cases, I like that the entrepreneur can't blame their current job for limiting their time. They fully immerse themselves in their business, and give it their best possible shot. And in many cases, this total commitment is what drives success.
The key here is probably that everyone's situation is different. The young entrepreneur might have an advantage in that it may be easier to leave their current position and jump 100% into their business. Conversely, the older entrepreneur with the family and mortgage may be less able to shoulder the risk of foregoing their current salary.
The choice is yours - take the leap fully or partially. Each can result in success.
The only choice that I truly hate is doing nothing. Too many people sit with great ideas in their heads but fail to act on them. And then, when someone else successfully executes on their idea, they say, "Hey, that was my idea."
To them I unfortunately say, "Who cares - it's the entrepreneur's willingness to commit and execute on the idea that really matters!"
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