Startup Toolbox

Jay Parkhill May 7th, 2008

Todd Vernon is the CEO of Lijit and wrote a post this morning that covers all the bases in angel financings.

http://falseprecision.typepad.com/my_weblog/2008/05/angel-financing.html

I won’t rehash the whole thing, but will comment on a couple of points.

Todd’s analysis of the different types of angel investors is very insightful.  In my ten years of experience advising startups, the family investor class is the most common type, but the companies that are unable to broaden their investor base beyond that seldom succeed in raising further money.

The analogy to burning cash is a good one, though I usually use winning the lottery to make the same point.  Startup entrepreneurs should be aware that at least on some level investment in a brand-new company offers about as much hope of return as lighting cash on fire, or spending $25,000 on lottery tickets.  No one makes that decision lightly.

I mostly agree with Todd about convertible note financings, with a couple of qualifiers.  First, no company should offer convertible notes if it doesn’t intend to convert them.  Todd seems to say that some people might undertake note financings intending to pay them off in cash rather than equity.  That is a terrible strategy and borders on abusive.

Second is that I have done successful note financings.  In almost every case the Note investor(s) are also participants in the equity round and are using the Notes as a genuine bridge so that the company can get some cash while completing the steps to a larger investment.  Notes usually come with warrants or other discounts from the equity round so there can be tension between the Note investors and the equity investors.  Having the same people on both sides of the deal helps immensely to smooth that out.

Good post Todd.  I am going to send a lot of clients to read your summary.

• Financings , Startups

Jay Parkhill December 8th, 2007

New Cycle Capital is a new venture firm with a mandate to make money while investing in the “green economy” and underserved domestic markets. This is an area I find fascinating because it is such an intricate dance; some of my earlier thoughts on it are here.

Companies focused on a single, economic bottom line really have one big thing to think about- making money. Companies that adopt a triple bottom line approach or some variation on it are juggling almost by definition to find a profitable business that supports the non-economic goals.

I think most companies can’t really put that off very well, which is why they settle for making money in one arena and using it to do good in others. Investment funds run much the same way. The Omidyar Network, for example, cites a commitment to “creating opportunity for individuals to improve the quality of their lives”, but a quick look at its Portfolio page shows a split between for-profit and non-profit investments.

Pacific Community Ventures is a $60M family of funds trying to do things differently. Part of their mandate is that portfolio companies employ a portion of their workforces in low/moderate income communities. They invested in Timbuk2, whose bags are made by just such people in San Francisco.

The fact that PCV is not a household name may suggest that this area is a hard-to-serve niche. I’ll be watching New Cycle Capital as another entrant in the field, and hoping to see more funds taking similar approaches.

• Startups , venture

Jay Parkhill November 8th, 2007

In Founders at Work, Joshua Schachter advises new entrepreneurs to keep the product simple- do one thing and do it well, in essence. This strategy worked well for del.icio.us, which is a simple (in a good way) web tool. He built it largely on his own in his spare time while working for Morgan Stanley and that setup worked very well for him.

Mike Ramsay from Tivo, on the other hand, developed an extremely complex product (I found great humor in the section of the book where he describes the enormous back-end efforts to manage programming information for every TV service in the US, and then explains why he feels compelled to throttle anyone who describes Tivo as “like a digital VCR”) that required enormous engineering, marketing and other resources. Tivo raised significant money from VCs and went public to raise even more. Again, this has worked well for Tivo.

This pattern also reminds me of the Dick Costolo/Marc Andreesen online debate about raising outside capital that I continue to see discussed from time to time. Dick built Feedburner with a relatively small amount of outside cash, developed an excellent product with it and sold the company to Google for a solid return. Consequently, his advice to entrepreneurs is to raise enough capital to allow for a good return for founders and investors even if the business is not a home run.

Marc, on the other hand, has built two large businesses and sold each of them for over $1B- two grand slams. Both companies were heavily VC funded and Marc believes that the cash gave both businesses the wherewithal to survive difficult times, revise their business plans and ultimately become very successful. Based on his experience, then, the advice is to raise as much money as possible whenever it is available on acceptable terms.

All of these companies and people were successful, which means all of them are correct. Del.icio.us and Feedburner needed only modest capital to acheive their objectives. Tivo, Netscape and Opsware needed far more.

This brings me back to a piece of advice I picked up years ago in an entirely different context. Professional cyclist Greg Lemond wrote a book on cycling training in which he talked about one of the great fallacies of training- emulating someone else’s habits just because the person was famous or successful. As he put it “what works for ___ is good because it works for ____. That fact that it worked for ___ doesn’t mean it is right for anyone else.”

In other words, the paths to success of others are valuable for the ideas they can provide, but they are not the “right” path for everyone. Past experiences are data points to analyze, not prescriptions to swallow whole.

• Financings , Startups , Tips & Tricks