Lessons From The Shark Tank
Bill Warner Monday, August 10, 2009
The new television show, Shark Tank, is more than a little hyped up and not terribly realistic about the process of raising angel or venture capital. A lot more preparation goes into getting a company ready to present to investors than is portrayed in the show. The investors looked much more arrogant and cut throat than they really are, and most of the entrepreneurs were substantially unprepared to make the presentations at this level of investing.
Lessons learned
However, there were a lot of lessons that should be learned by entrepreneurs. Some good things were done and some terrible mistakes were illustrated.
- You must present a business story, not a story about an idea. Emmy the Elephant and Ionic Ear were the cases in point. Both were explaining what their product is and how it works. They never explained why they had attractive businesses. When you are presenting to any group of investors, you need to explain what the business model is, describing how you are going to make money. Then, in turn, explain how the investors will make money as well.
- A start-up business has to have a laser like focus and not try to approach too many markets at once. The Pie Factory had a great business going in wholesaling sweet potato pies. His major selling point to investors, a deal with McDonalds, almost had to be dragged out of him. He wanted money to expand his business, and was making thirty other varieties of pies, taking attention away from his core business in sweet potato pies. They got their investment, but at a valuation that was substantially less than their revenue. If he had been more focused on wholesaling and had a confirmed deal with McDonalds, he could have gotten a much higher valuation.
- Unrealistic valuations are common place, but are usually worked out prior to a major presentation like we saw. However, the lesson learned here is that entrepreneurs really have to spend the time to understand what their business is worth right now and offer the investor an appropriate share for the money they will be putting into the company. The Pie Factory was valuing an $850K business at $4 million plus. Poor Kevin Flannery was valuing his business at $10 million plus, with no revenue. Iconic Ear’s valuation was over $6 million at the prototype phase of development. These are not even close to being reasonable and show that these entrepreneurs did little research into the investor market.
- The heart breaker was WiSpot. Kevin Flannery showed a failing business in which he has personally invested his family’s life savings. The investors did him a big favor by telling him that his business model was not attractive and never would be. Their advice was all about knowing when to quit. Entrepreneurs should be listening for good advice from seasoned entrepreneurs and investors. When a lot of people are telling you that the dog is not going to hunt, then you need to move on to something else. It’s a shame that Kevin had to get that news in front of millions of people.
- Entrepreneurs really need to be prepared to negotiate. Emmy the Elephant was raising $50 thousand and was selling 15% of her company. The company is at the prototype phase. She was offered the money, but at 55% of her company. She took the deal, probably not knowing that she just dropped her pre-money value to about $40 thousand and gave up control of her company. Not a great deal, but maybe it was right for her. Nevertheless, entrepreneurs need to know their numbers and come into such a negotiation with clear reasons for their valuation and knowing what they are willing to give on as well as their walk-away point.
- Arrogance and a bad attitude is not a good thing to display in front of investors. The College Foxes Packing Company got hammered because they were not willing to share their current company with investors. Instead, they insisted on trying to sell a spin-out services company that has no revenue for $250 thousand and a 25% share. The negotiation got heated and the entrepreneurs insulted the investors and ultimately turned down a sweet heart deal because they were unwilling to share any piece at all of their current business. In reality, these entrepreneurs should have known that the negotiation would go the way it did and been prepared with a clear position and counter offer.
Once you peel away all the dramatic showmanship, this program has some valuable lessons for entrepreneurs. These mistakes are made every day, and can be avoided by good research, preparation and getting solid advice from experienced entrepreneurs.
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IPO’s and Angels
Bill Warner Tuesday, July 28, 2009
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A New Venture Capital Fund That Acts Like Angels
Bill Warner Monday, July 06, 2009
Mark Andreessen and Ben Horowitz just announced a new $300 million venture capital fund that looks, smells and walks like an angel fund. Andreessen Horowitz is focusing on the best entrepreneurs, products and technologies in the industry. Read the details in BLOG.PMARCA.COM.
The founding principles make a difference
Their founding principles are extraordinary and may spell what could be a refreshing new model for venture capital firms:
- Their claim is that technological advancement is at the core of human development. Although this is generally accepted, the founders’ backgrounds indicate how serious they are about moving technology forward.
- Furthermore, technology change fosters continuous opportunity for even greater changes in the future. In other words, investors need to understand that this a continuum that will drive even greater advancements as new technologies are developed.
- Here is the one that catches my eye. They say that the technology start-up is all about the entrepreneurial team and their vision. This kind of pokes a stick in the eye of the limited partners who mostly think it’s all about them. They obviously have investment partners who agree with this principle.
- New companies today need a lot less money than they used to in order to get started. The services available on the internet today make it much easier to launch a company. Once a company is successfully launched, more money will be needed for market expansion.
- Having the best possible team of advisors and investors to support an outstanding entrepreneurial team is also a refreshing principle. This firm can certainly bring the best of the best to support great entrepreneurs.
- They cite the importance of trust in building a great company. This too is revolutionary and bodes well for a new attitude between venture capital and entrepreneurs.
- They are not buying into the promise of clean tech, biotech, transportation, nanotech and life sciences, and will stick to their guns by investing exclusively in information technology innovation.
- Just like angels, they will focus on their own geographic area of Silicon Valley.
Focus on start-ups
Their fund is huge. Nevertheless, they are building their firm on the idea that it should be the kind of firm they would want to work with when they were young entrepreneurs starting new companies.
They will invest anywhere between $50 thousand to $50 million, depending on the company’s stage of maturity. This will include start-ups with seed round financing as well as later stage financing rounds for high-growth companies.
Andreessen and Horowitz will be the only general partners of the firm, and will personally make investment decisions aided by a small staff of other professionals.
It’s all about the entrepreneur
They are looking for the best of the best in entrepreneurs who have a compelling vision about taking on a big market opportunity. They favor strong technologists who know what they want to build and know how to go about it. They also have the belief that the founder needs to be the CEO, and favor entrepreneurs who have that potential. They believe that the CEO skills can be developed.
They are all about the product and that companies are build around products. Investors need to intimately understand the company’s products. Surely, Andreessen and Horowitz are very capable of carrying out this principle.
It is exciting to see the emergence of this venture capital firm, run by two leading entrepreneurs and investors. Their ideas are refreshing and bold and may spell a new investment model for venture capital firms for the future.
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Venture-Backed Liquidity Continues to Plunge
Bill Warner Thursday, July 02, 2009
Venture-backed liquidity continues its plunge that started in 1Q08. It’s now down to $2.8 billion, a 57% drop since this time last year, and down from $18.4 billion in 4Q07. The number of venture-backed IPO transactions continues to be anemic with three so far this year, versus seven for all of last year. M&A is also down to 67 deals totaling $2.6 billion, down from $16.2 billion in 4Q07 and a drop of 23 percent since last quarter. See all the data at VentureSource.
Venture’s life blood continuing to be squeezed
As you know, these two types of transactions are the life blood of liquidity for venture capital firms. With so few transactions, venture firms are feeling the pain with no viable way to exit from their portfolio companies. Their entire business model is built with the assumption that there will be a sizable exit. Of course, very few of their investments achieve this goal, but they are supposed to more than offset the lower performance or losses experienced in the rest of their portfolio. With M&A’s and IPO’s continuing their decline, venture capital firms are faced with not being able to meet their commitments to their limited partners.
The fallout continues
Unfortunately, there are also an increasing number of venture capital firms backing away from the market in the face of these realities. You have read about the optimism of the National Venture Capital Association’s initiatives to find new venture capital business models and several venture capital firms experimenting with new markets as well as smaller investments with small expectations for returns. These are far too late for many firms, especially those that need to raise new funds. We will continue to see the fallout through the remainder of the year.
What is the future of venture capital
With the continued anti-business and anti-venture capital regulation by the federal government, it is hard to imagine how the current venture capital market will survive. We are more likely to see a continued weeding out of the weakest firms as others redefine themselves with business models that are much more modest with respect to amount invested per company, expected returns and time to exit. Models like this are being tried as some firms actually are dipping down to take on some pure start-ups. Others are playing in the debt markets which would be an entirely different model for achieving returns to their limited partners.
What about entrepreneurs
As for entrepreneurs, you have to analyze the viability of any venture firm that you approach by taking a hard look at the value of their current portfolio and where they stand with their current fund. You want to determine if they are going to be able to be with you in subsequent rounds and whether or not their key personnel will be there to assist you. A lot of hard questions need to be asked about their business model so that you can satisfy yourself that they will be a long lasting partner or not.
They will certainly offer low valuations and strict terms, but the negotiation is a two way street. Make sure they are really going to be worth what they claim to be.
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Venture Capital Snubbed By SBIR Bill
Bill Warner Thursday, June 18, 2009
The Senate committee unanimously passed the bill to renew the Small Business Innovation Research (SBIR) program with only partial support for venture backed company eligibility, allowing them to have access to 18 percent of the Department of Health and Human Services and 8 percent of all other agencies. Read the details in the Wall Street Journal.
The problem with venture capital backed companies
This debate has gone on for years and comes down to two opposing views. The first is those that think that grant funding is an integral part of a company’s financing strategy and that there should be no restrictions on the amount of private equity money invested in the company. The other view is that grant financing should be devoted to private companies that are not substantially owned by venture capital firms.
The debate continues
This is not the last we will hear about this debate. The National Venture Capital Association and the Angel Capital Association are strong advocates for lifting the restrictions on venture capital backed companies. In any economy, it seems like a good idea to strengthen the financing capability of entrepreneurial businesses.
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Institutions Decrease Private Equity Investments
Bill Warner Tuesday, June 16, 2009
As we all know by now, institutions who invest in venture capital are backing away from this asset class. Now, the Coller Capital report provides some quantitative evidence in its most recent survey.
Institutions reduce investments
The bottom line result is that 20 percent of institutional investors plan to decrease their allocations to private equity this year; the largest decrease since the survey started in 2004. Another 15% plan to increase their investment, but even that is substantially down from previous years.
The core problems with institutional investors
The report cites the fact that there are fewer private equity firms to invest in, and many more will not be able to raise additional capital because of their poor performance. The survey predicts that there will be a 28 percent decline in the number of venture capital firms that will be able to raise additional funds. A shocking 84 percent of the institutions have chosen not to reinvest with their existing general partners. We know that the IPO market for venture capital backed companies has dropped to near zero, and that acquisitions are harder to get as well. This puts a major hole in the venture capital firm’s business model which requires a huge upside exit in order to achieve their expected returns.
Well, institutions haven’t fared that well either. Many have experienced 30 to 40 percent declines in their value with the market downturn, putting pressure on the ratios that govern how much they should be investing in this asset class. So, there are problems on both sides of this coin.
Expect a power shift in venture capital
There is good reason to believe that institutions are going to have more power in any negotiations for new funds. It’s a buyer’s market. There will be a lot of pressure on getting higher value for the fees that venture firms charge and deal terms between them are going to be more favorable to the institutions.
All said and done, this means that entrepreneurs have really got to have a great business story to attract venture money. It has been getting harder and harder to acquire venture money since the end of 2008, and it doesn’t like it is going to get any better this year.
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Financing the Launch of Your Company
Bill Warner Tuesday, June 16, 2009
Once you have gotten your company through the proof of concept stage and are now at the point that you have a product or service ready for market, you will need to finance this phase of your company’s growth.
Many of the alternatives that were considered for the seed financing of your company can play a role in this stage of financing as well. The additional alternatives to consider for this stage of financing are:
- Bootstrapping
- Strategic Partnerships
- Customer Partnerships
- Angel investors
Let’s take each of these and explain the purpose and implications.
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Approaching Angel Investors
Bill Warner Friday, June 12, 2009
You only get one chance for success when approaching angel investors. You need to make the most of it by being very well prepared. Here’s some really solid advice from Jim Casparie in his Forbes article. Take a look at Paladin’s suggestions as well.
Like the Boy Scouts, “Be Prepared”
You would never think of approaching a potential customer or alliance partner without being well prepared. You have a purpose, an agenda of what to talk about, a desired outcome and a negotiating position. It takes more than a little work to get ready for such a meeting. Well, it’s the same for getting ready for angel investors. Being prepared includes:
- A complete business plan including financials
- Knowing all about the angel investor group, including their business interests
- Referral by an influential business person
- A concise business plan presentation that is customized to the angels group’s interest.
- Practice, practice, practice; especially answers to anticipated questions
Attitude and mindset matter a lot
No matter how good your business may look to investors, they are really investing in the entrepreneur. Investors know that passion makes the difference. So, let it show in a balanced and business-like way. Angels have to have confidence in the entrepreneur or they won’t invest.
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Cleantech the Target of Venture Capital Firms
Bill Warner Wednesday, June 10, 2009
Talk about major shifts in investor interest, cleantech is getting an incredible amount of attention from global venture capital firms according to the 2009 Global Trends in Venture Capital Report by Deloitte. They are perhaps hoping for attractive incentives from government initiatives as global warming programs kick in throughout the world.
Cleantech is hot
Just five years ago this annual survey indicated some interest in clean technologies and the life sciences. This year, regardless of fund size, there is tremendous interest from VCs in both of these sectors, especially clean technologies, where more than six out of 10 respondents anticipate their investment levels to increase and another three out of 10 will hold their investments at the same level.
Among U.S., UK and Israeli investors, about half expect to increase their investments in cleantech, while about seven out of 10 AP respondents and European respondents expect their cleantech investments to increase. Two-thirds of respondents from the Americas plan to increase their cleantech investments. This interest could be because they are seeing an increase in government/political support for cleantech and VCs are looking more to government participation in both investments and incentives.
Other investment sectors are mixed
Semiconductors and electronics could suffer a 50% reduction in investments, while medical devices may see a nice 37% increase. Telecommunications could achieve an underwhelming 15% increase and 29% decrease. Software, new media, social networking, biopharmaceuticals and consumer businesses will hover around 25% increases with similar decreases, while more than half will keep their investment levels the same.
Weathering the storm
Keep in mind that this is all in the context of a worldwide economic recession. In general, VCs are decreasing their overall investing dollars, focusing on their best companies and increasing their allocation to later-stage investments.
Lower valuations could present opportunities for VCs looking for a good deal. It is too soon to say that they will take them. Larger firms may experience a bigger slowdown than the smaller firms. Just more than half of respondents from firms managing $500 million or more are decreasing their level of investment, compared to about one in three of those managing $99 million or less.
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Asia the Darling of the Venture Capital World
Bill Warner Wednesday, June 10, 2009
According to the 2009 Global Trends in Venture Capital Report by Deloitte, Asia is becoming one of the most attractive investment geographies in the world. In addition to the already understood impacts the economy has had on the venture capital markets, this reports adds a global perspective that we don’t often see. However, these trends are not new, but are more dramatic this year.
Venture Capital Attractive in Asia
Half of all respondents expect their investment levels to increase in Asia (excluding India); while 43 percent expect to increase their investments in India over the next three years. In 2007, 41 percent of respondents indicated an interest in expanding their investment focus in Asia Pacific. About one-third expect to increase their investment levels in South America. Only 17 percent expect to increase their investments in North America, the same as 2007.
Interest is worldwide. When it comes to interest in Asia and India, UK respondents are the most enthusiastic, planning either to increase investment levels (67 percent and 58 percent, respectively) or keep them at the same levels (33 percent and 42 percent, respectively).
But, about nine out of 10 U.S. VCs are also increasing or maintaining their investments in Asia and India and about the same number of respondents from Asia Pacific have similar plans.
Declining Interest in North America
Investment interest in North America seems to be decreasing. Only 29 percent of VCs in the Americas (excluding the U.S.) plan to increase their investments in North American countries while 37 percent expect them to remain the same. Twenty-two percent of Israeli investors plan to increase their North American investments while 33 percent expect investment levels to remain the same. European investors (excluding the UK) are looking at a 16 percent increase and half expect their investments to remain the same. Only 15 percent of Asia Pacific VCs expect to increase their investment in North American countries while 40 percent expect it to remain the same. In the UK, a mere 14 percent plan on increasing their investments but 48 percent plan on keeping their levels the same. Even among
U.S. VCs, only 16 percent plan to increase their North American investing levels while 71 percent expect their investment levels to stay as they are.
This report further substantiates that the global venture capital market will continue to play an increasing role in venture capital firm investments.
