Blog: investors and fundraising

Aug
12
2011
By Avery Faller

Speaker: James Geshwiler
Company: CommonAngels

James Geshwiler HeadshotIn his talk to the YEI Fellows James Geshwiler spoke about a variety of issues from the inner workings of an angel investor fund to why President Obama wants more entrepreneurs. Perhaps the most interesting topic that James touched upon was that of areas of potential risk and return in a startup, which investors (like James) use to evaluate your company from your pitch through due diligence. 

While doing due diligence on a large number of companies, James uses a classification system that he learned while he was an analyst for the CIA.  Originally used as a tool to help think about potential Soviet espionage and state secrets, this system is comprised of three categories: Secrets, Mysteries, and Imponderables.  Placing information into one of these categories allows the evaluator to recognize which pieces of information are attainable and which are not, saving time and increasing accuracy.

Due Diligence with a Grain of Salt (or Two)

CommonAngels LogoSecrets are pieces of information that are not immediately apparent, but do actually exist.  Investors like to see startups that have exclusive rights to proprietary information, like patents and algorithms—in other words, “secrets.”  These give the company a distinct advantage over potential competitors.  For example, the hypothetical company Nacho Cheese X, which manufactures and sells nacho cheese, keeps its proprietary cheese formula a secret.  However, secrets aren’t always positive:  despite their secret recipe, Nacho Cheese X lost $300,000 last year.  And there are secrets about the competitive landscape and other players, like what Nacho Cheese X’s biggest competitor Macho Cheese’s next product will be.  A major component of due diligence is unearthing the secrets about your company and evaluating your competitors as well to ensure that you are truly differentiated and that your product is competitive in the market.

Mysteries are things where there is an answer, but there is not a direct way to discover it.  For example, the question of “What is the size of the nacho cheese market in the US?” is a mystery.  Some analyst companies may perform detailed analysis and come up with a number for the market size, but in many ways this is still just a rough estimate.  The risk associated with mysteries can be mitigated by employing work-arounds like this to guess at what the true answer will be, and smart investors include this type of analysis in their diligence.

Finally, Imponderables are things that there is no way to know or figure out.  “Which company will dominate the nacho cheese industry in 5 years?”  Nacho Cheese X will work hard to increase its market share, but there is simply no way to know for certain if they will “win.”  This is especially true in technology industries where product turnover is incredibly high.  For example, the first iPhone was only released a little over 4 years ago.  One way to deal with imponderables is to try to be prepared for any potential situation.  Nacho Cheese X, for example, also plans to release Salsa and Hummus lines to diversify its holdings.  As an investor evaluates an opportunity, this is where the true element of gambling and risk comes in: in a way, he or she must make a leap of faith hoping that the imponderables remain favorable for your company.

James Geshwiler Speaking

The Takeaway

Just as investors use this framework in assessing investments, it is also valuable for entrepreneurs when evaluating an opportunity or defining a strategy for their fledgling startup.  Consider what information you need to know to be successful, and place it into each bucket – secrets are discrete facts you can find out, if only you look in the right place or ask the right person, so ask!  You can make educated guesses about mysteries, drawing inferences from various sources or estimating based on other knowledge.  Finally, accept that imponderables are just that: unknowable pieces of information that any amount of thinking and research will not be able to reveal; obsessing about them won’t work, but you can turn your energy toward hedging your bets.  In other words, don’t ask “Will I be successful?” – focus instead on doing what you need to do today that can turn that imponderable into “just” a mystery (or a secret!).

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Jul
26
2011
By Avery Faller

Speaker: Jarrod Yuster
Company: Pico Quantitative Trading

Pico Quantitative Trading LogoInvestors often weigh the strengths and weaknesses of a venture’s founding team as much as, if not more than, the strengths and weaknesses of the venture’s product.  It is important for the investor to feel confident that you, as the founder of a company, will be able to build your product either through your own great knowledge or through your ability as a leader to attract talent to join your team.  During his talk to the YEI Fellows last week, the founder of Pico Quantitative Trading and sometime angel investor Jarrod Yuster explained what skills investors look for in a good founder.

What Makes a Good Founder?

Jarrod Yuster HeadshotAt startups, people are called upon to widen their roles to fit the needs of the growing company.  One of Jarrod’s main points about founders is that their roles will change as the company grows and its needs evolve, so the traditional, specialized employee can actually be at a disadvantage in a startup.  When investors are examining a founding team, resourcefulness and flexibility are important because these skills will allow the founding team to adapt to changing situations as their company grows and morphs. 

Investors also like to see that founders are good listeners.  Investors have an outsider’s view of the company and year’s behind them in terms of seeing how other startups have succeeded or failed—they want to know the founders are coachable so that investors pass along this knowledge.  But good listening is not just a trait that founders should “turn on” for investors.  Good listening is a skill that founders should employ at all times.  Listening to advisors can help a company make the right decision in situations where the company’s advisors have experience.  Listening to clients can help a company assemble the right products, and listening to the marketplace can help a company pivot before they cease to exist.

Another important area investors are sure to examine the founding team on are their execution skills.  Are you execution-oriented?  You may be able to talk the talk, but can you walk the walk?  Jarrod pointed out that a get-it-done mentality is a great skill and investors are sure to examine your company’s product(s) as proof that you have the ability to achieve results.

The Takeaway

While investors are evaluating you, you should not feel odd about reciprocating the favor and taking a good deep dive into the history and past of your potential investors.  How have past companies that they have invested in fared?  Don’t be afraid to speak to founders at some of their current companies to see if they have been comfortable working with them.  While you may feel compelled to accept the first investor that comes a-knocking on your door, know that when you accept an investor’s term sheet, like it or not, they become a member of your venture.  So make sure that you believe you can have a comfortable working relationship with an investor before welcoming them onto your team.

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Jul
12
2011
By Avery Faller

Speaker: Mary Anne Rooke
Company: Angel Investor Forum 

Mary Anne Rooke HeadshotOK, so your company is doing pretty well.  You’ve built out a beta of your product, you’ve received some positive user feedback, you’ve identified your primary market, and you have an experienced team with complementary skills.  Now what?  Well, it sounds like your company is in a good position to begin seeking funding.  Last week, Mary Anne Rooke, a member of Connecticut’s Angel Investor Forum, came to speak to the YEI Fellows about the funding process.  Mary Anne explained the differences between the different types of funding and who invests in each stage.  If product development is in progress you should seek Seed Stage funding, which will primarily come from Founders, Friends and Family.  If your company is beginning to make sales, then you should seek Early Stage funding from Angels and Boutique VCs.  And if your company is beginning to ramp up sales and needs a hefty dose of capital to do so, then you should seek Series A or B funding from VC firms.  

Before we get to the heart of this article, let me just say that funding is a big responsibility.  Not all companies need outside funding.  Some will be able to bootstrap their way to profitability, and some will be profitable from day one.  When you take funding, your investors have become members of your team either directly, through a board seat, or indirectly through their influence over the team members.  So, think hard about whether you really need it, and if you decide you do, here’s a little bit of information about it: 

Angel Investing 

Angel Investor Forum LogoSo, when exactly is it time to seek funding?  According to Mary Anne, it’s when your company has made as much progress as possible with the resources it has on hand and can literally go no further without funding.  If your company is looking for a raise between $250,000 and $2 million dollars, then you’re most likely looking to Angel Investors—last year, although Angels and VC firms each invested around $17 billion nationwide, that money was spread out in 57,000 deals for the Angels, and only 2,800 deals for the VC firms.  That means that although funding is really, really hard to receive across the board, it is much more likely to receive an investment from an Angel over a VC firm. 

Angel investors are people who invest their own money.  This means that, yes they are motivated by profit, but more importantly, they will only invest if they believe in the people.  That is because they are not only looking to invest their money, but also their time in helping the management team grow the company.  Many Angel investors were themselves entrepreneurs at some point and therefore, they will be motivated to help you because they have a passion for creation.  

One of the major differences between VCs and Angels is that VCs are investing other people’s money, and in larger portions, and as a result, when they invest, they are looking for bigger returns.  While Angel investors look for an exit in three to five years with around 10 times what they invested, VCs will look for a five year exit of 30 times, which often equates to $100 million dollars in revenue.  

The Takeaway

Funding is a long and arduous process and should not be undertaken unless your company really needs the funding and is ready for it.  Be aware that Angel investors and VC firms alike are looking to make a hefty profit which may not be possible in the business that you are in, and if that’s the case, it may be hard for you to find outside investment.  That being said, if you are ready for funding, and you find the right investor who respects and trusts your team and is knowledgeable in your market, he or she can become a key asset as an advisor to your company, helping you through the next stage of growth.  

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Jul
06
2011

Panel

Panel Members: Elon Boms (Launch Capital - not pictured), Liddy Carter (Angel Investor Forum - left), and Rob Bettigole (Elm Street Ventures - right), moderated Daniel Crosby (Withers Bergman LLP - center)

Recently, the law firm of Withers Bergman hosted the YEI Summer Fellows for a panel discussion on “how entrepreneurs should work with investors.”  Moderated by Dan Crosby, a lawyer at Withers Bergman with years of experience advising startups on raising capital and growing their business, the panel represented a variety of viewpoints.  Elon Boms from Launch Capital and Rob Bettigole from Elm Street Ventures are both partners at venture capital firms, while Liddy Carter has experience as an angel investor (through CT’s Angel Investor Forum) and as a venture capitalist at Enhanced Capital.

The panelists talked about the basics of investing, including everything from the difference between angel investors and VC firms, to what they look for in startup.  While seeking VC funding is down the road for many of the early-stage fellows from this summer, the panel was highly informative and provided a solid basis for the Fellows to understand the investment process when they reach that stage.  Thanks to Withers Bergman for hosting us! 

For more information about investing, be sure to follow up by reading our articles on Angel Investing and Due Diligence.

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Jun
17
2011
By Avery Faller


Speaker: David Rose
Company: Angelsoft

Angelsoft LogoDavid S. Rose has seen it all.  As a lifelong entrepreneur he has ridden the wave of the technological age through booms and busts, bubbles and the birth of entire new sectors.  Yesterday, David spoke to the YEI Fellows about the venture capital funding process; in particular how to represent yourself and your company when presenting to investors.  His unique experiences on both sides of the table as a serial entrepreneur and as an angel investor showed through as he gave an insightful talk about how to pitch. 

Presentation

David Rose Headshot

Most people go about constructing their pitch with a rote step-by-step approach, creating a PowerPoint presentation and filling it with information.  David encouraged the Fellows to break out of this habit by concentrating on the bigger picture in three key areas: Content, Presentation and Delivery. 

The Content of your pitch needs to have a natural sequence, a flow.  When you walk into a room investors will have a neutral opinion of you.  You have the first thirty to sixty seconds to make your first impression and move that opinion from neutral to positive.  Say something to grab the investors attention.  You want to tell them a story that is so compelling that by the end of the talk, they write you a check on the spot. 

The Presentation of your pitch should be all about simplicity.  David spoke about the unspoken deal between presenters and audience members: if you show it, they will read it.  For this reason, he emphasized the relative worth of clean and simple graphics over text.  He also spoke to the importance of minimalism.  Keep it simple and clean. 

In the Delivery of your pitch, David highlighted a method that he had been implementing throughout his talk of “say it then show it.”  This refers to talking about the contents of the coming slide before you show it.  This gives the impression that the slides are there to back you up, rather than the other way around.  Luckily, many programs like PowerPoint and Keynote allow the speaker to see the upcoming slide if there are two screens plugged into the computer. 

The Takeaway

David’s talk was humbling, to say the least.  In addition to presenting all these points he was simultaneously an active practitioner of his own methodology—he was pitching to us, his audience, trying to get us to invest our time and energy in his concept of a proper pitch?  

I bought it.

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