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Sunday, August 28, 2011

Is the Financing Really Done?

The term-sheet was completed weeks ago.  You and the new investors have just executed the final deal documents and a syndicate will be making an investment in your company.  A closing date has been selected.  You are soon to meet with your current investors to get the approvals you need in order to close.  Life could not be better, right.  Not so fast!  Sure you have contractual arrangements, but what if the investor group says they changed their mind. 

There are always discussions where investors express interest in investing in your NewCo. They say they want to invest, but never seem to get around to it.  Many times entrepreneurs say, NewCo is in extensive discussions with an Angel or a group and the money is coming soon.  At least in these cases, the agreements have not been signed and one can expect the investor may not invest.

In real life, even with signed deal documents, the investors can back out if they desire to do so.  They do not even need to use a clause in the agreement to abandon the financing.  They just tell you they are not giving you the funds.  Talk about a downer!

Even if you get the funds, what if they want the funds returned and take you to court to get the money back.  The reason, may be simply they believed something was to happen, they realized it would not.  The investors changed their mind and no longer believe the investment sound.

Keep in mind that investors go by the Golden Rule; “They Have the Gold, and They Set the Rules.”  In the case they ask for the funds back, you can use their money to fight in court.  In the case where they refuse to go through with the deal, you likely do not have the funds to go to court to enforce the agreement.  NewCo is hurt in either case.

The whole point is that a financing is not done until you close and have spent all the money.  You must always be on guard and expect the unexpected.  From experience, I can say that standing in front of 60 current investors and canceling the shareholder meeting until a date uncertain is no picnic.  Negotiating with the investor pool to get them to close in such a case is awkward at best.  It may even require help from stronger friends!

The bottom line is, don’t get arrogant when you are about to close on a financing; be happy, be excited, be grateful, but cautious.  If you close and get to keep the money, don’t get too cocky; be vigilant and cautious.  You never know when something will happen to take that smile off your face.

  Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon 

Friday, August 26, 2011

Dilution and Investment - An Answer You May Not Expect

You may remember the Dot.Com bubble which burst around 2000-2001 timeframe.  Prior to the burst, investment and valuations were out of control.  It seemed that all anyone had to do was write a business plan to get money and high valuations.  The stock market reflected the degree of excitement especially in technology.  The trends of looking at revenues and investing at PE ratios in the 10-20 range went out the window.
Biotechnology has been trough several cycles of investment where excitement centered around the sizzle not the steak.  Maybe you remember, there were several intervals in the late 1990s where biotech was the major new investment for many.  Many millionaires were made in the biotechnology space (same for technology space) and it was always interesting to see what Genetic and Engineering News posted quarterly for the new millionaires being added to the list.
The past is the past! Investors occasionally learn from the problems and losses they made in the past, and they take longer before they believe the same problems will not happen next.  In 2000, I met a hedge-fund manager that had done rather well.  He had hired some really smart young scientists that reviewed public biotech companies and advised on the biotechnology investments for the fund.  Interestingly, they decided to look at biotech companies running late stage clinical trials.  The fund shorted the stock in nearly all they chose to invest in.  Biotech stock prices almost always fall when the data from a clinical trial is not satisfactory to gain an FDA approval.  So the fund just guessed that most of the companies would miss the endpoints, shorted the stock, and made lots of money.  The returns in the fund were greater than 60% per year for a 3 year period!  The companies with low prices either had to dilute investors in a financing, had enough to survive, or went out of business.
After 2001 and 9/11 (I was actually in NYC at 5th and 40th when the planes hit), the investment in technology and biotechnology was extremely difficult.  The markets had hit bottom and some described it like the nuclear of fund raising.  It certainly seemed so.  Deals were much more difficult and investors became much more careful. They demanded more and there were fewer funds as many had gone under over the following years.
In 2007-2009, the situation turned bad again.  VC funds were hard hit and could not raise capital.  One investor group that placed investments in VC funds informed me that they were dramatically limiting which VC funds they invested in.  They believed there were too many and selected only those that had been around for the longest time.  Many of the traditional funds had redemptions and their capital fell off and they made only limited investments.  Complicating things was the large number of companies seeking capital.  This made it a BUYERS market for the funds and difficult times for the companies.  A company really had to look stellar and have prospects of short-term exits or valuation inflections to attract attention.
Getting deals with large corporate partners were also a major issue.  The corporations were cherry picking.  They had many opportunities to choose from, so only the very best got the deals. When a deal was consummated, the large corporations could not raise capital to do additional development and they could not borrow from banks.
Why bring up the past?  In developing a startup, it is critical to plan ahead.  Having cash in the bank is sometimes the only way you can survive when the “Black Swan” events occur.  You can NOT predict the future.  You do NOT know when financing windows will close.  So when you consider the Dilution Effects of a financing, remember the following advice delivered by many old timers; “It is Better to Have 10% of a Lot of Money, than Have 100% of Nothing.”  You don’t want to dilute the investors too much, but you want enough funds to ensure you can weather any storm and that you will not run out of money. Running out of money at the wrong time Leaves You With Nothing.

Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon 

Wednesday, August 17, 2011

Need Money? A Few Links to Possible Investors

It is clear that if you have a new startup, getting investors is essential.  Some startups take smaller amounts of cash than others. Borrowing against ones property to fund the business is risky and it is advisable to think very carefully if you elect to take this as your means of capital.  You may end up owning most of the business which is great if the company succeeds, but if it does not, why lose your house.  There are a wide range of possible resources to explore.  They are often topics of startup blogs which you can find in the internet.  With some of the recent trends, this issue is being revisited here to provide a updated useful links and discussion for consideration.

Remember that most startups get no professional investment in the early years.  You may need to manage with no salary for prolonged periods of time.  In addition, some investors do not want to see early cash go toward salary.  They want it invested in the technology.  Later in the investment cycle, you can get paid, but plan to survive with no salary from the startup for a year or two.  Self-funding is a great option IF you can afford it, but do not quit your day job.

A recent article in CNN Money titled “Cash is king: 8 tips for optimizing your startup financing strategy” describes issues in developing a strategy toward raising capital.  It reviews key issues like valuation, risk, and milestones. If this is your first startup, it may be worth reviewing before going out to talk to investors. 

Sources to consider for capital:

·        Friends & Family are often used in early times by many startups.

·        Crowdfunding is a relatively new activity that may allow for capital raise of $100,000 or less (usually less).  Crowdfunding requires casting a wide net in order to gain small amounts of cash from many investors or donors.  GrowVC recently wrote an article titled “5 Ways to Initiate The Crowd In Crowdfunding .  The concept is discussed along with some thoughts on ways to attract groups.  An internet search will also provide more ideas as this is a hot topic of late.

·        Small business, SBIR, Government, State Grants and/or loans are sources. The military, NIH, and NSF can also be considered.  There are also not-for-profits specific to certain diseases that fund programs as well.

·        Loans or lines-of-credit.  You can borrow from certain state agencies against your technology in the company.  One interesting approach is getting lines of credit for via possible vendors.  If a vendor wants to lock you up as an exclusive, ask for something in return! One can borrow against personal assets but, this adds risk beyond the time spent with no salary.

·        Startup Incubators.  Sometimes you can get services for equity in incubators.

·        Angel Investors often like to get in very early VCs usually come after the company is better established and better developed. Angels are most often high-net-worth individuals desiring investment in early stage companies.  Their reasons vary widely.  Single investors are common, aggregates and clubs exist as well.  Look around and network.  A recent article titled “The Top 10 Angel Investor Groups” listed   Ohio TechAngel Funds, Tech Coast Angels, Investors' Circle, Golden Seeds LLC, North Coast Angel Fund, Band of Angels, Hyde Park Angel Network, Alliance of Angels, Pasadena Angels, New York Angels Inc. In addition, there are resources listed in the website of the Angel Capital Association, a trade association of investment groups.   An article titled, “Choosing a business angeldescribes some attributes you may want to look for in investors in your startup.  Remember, you are taking a partner and you will be living with the investors for some time.

·        Venture Capital firms are becoming more conservative in investing.  The choices are many, the funds less, and the criteria have been elevated.  Be prepared to have extensive diligence reviews and negotiate tough deals.  That said, a few articles list venture firms are:  Top Venture Capital Firms of 2011 Based on Deal Activity (Q1 2011) , The Top 10 VC Firms, According To InvestorRank , Top 14 Venture Capital Firms.  There is a National Venture Capital Association and the web site contains info that may be useful as well.  Another way to find possible VCs is to look at competition and see which firms invested in their financings.  Sometimes, these firms will talk to you because they know the space. Your legal counsel, accounting firm, advisors, and friends likely have contacts with VCs and will make introductions.  In dealing with VCs, they often give better consideration when introductions come through known sources; i.e.  NETWORK, NETWORK, NETWORK, this will take you a long way. 

·        Equity or future revenue streams could be traded for services.  You are trading paper today for promises in the future when you have money or value.  I always like this one!

·        Licensing or Partnering with a BigCo or Vendor.  You are forming a deal which will hopefully be a Win:Win arrangement.  These can come with upfront cash and future payments from the partner, or for services now and promise of future payments.  

·        Commit to a major customer.  This may be more for technologies which are user oriented but may not fit with medical products for example.

Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon

Tuesday, August 16, 2011

Right Place & Time, Diligence & Devotion, and Culture

The book “Outliers: The Story of Success” by Malcolm Gladwell highlights several examples of how many people succeed while others seem to not fare so well.  There are themes that recur over and over again like being in the right place at the right time, persistence, devotion in learning an area, and developing the right cultures.  

Whether you believe Gladwell’s analysis and conclusions or not, three of the topics addressed in his book contribute to major differences that result in making it “BIG” and being an “ALSO RAN” type business. 

Culture:  The culture developed in the business can be one of innovation, creativity, and hard work.   It helps motivate growth and improvement when the culture is such that people love coming to work and being with their colleagues.  This type of environment leads to people wanting to do their very best to make a business a success.  It takes effort to generate an environment where all employees are motivated by the success of the company.  It is even a greater challenge to encourage the employees to express their feelings and question management when they see a better way to generate success in the company.

Developing a great corporate culture encourages employees, but is also means finding ways to acknowledge and reward the employee for full contribution.  It can come in forms of compensation initiatives, but sometimes recognition for a job well done is even more important.  Everyone likes to hear “Thank You” from time to time and something in their paycheck does not hurt either. 

In short, the culture created in the company can make a huge difference in motivating the employees to help the business become a big success.  It also can help with employee retention and overall enjoyment at work.

Diligence & Devotion:  According to the analysis reported by Gladwell, it takes about 10,000 hours to become an expert in an area.  The point he was making was that becoming a success is not immediate and that developing the experience to excel takes time.  It is not so likely that someone with no experience can set up a business overnight and have it become an instant success.  Just the learning required to understand the business takes significant time. And, it comes with hard work and countless hours of leaning. 

The attitude that the entrepreneur adopts when entering a business is critical.  The business activity needs to be interesting and fun, or the entrepreneur will never devote the time required to become a success.  Each success or failure along the way will add to the skill set.

Diligence and devotion are absolute requirements for the entrepreneur starting a business.  The sticking to the tasks, learning, and a drive to succeed are all important to the overall success.

Place & Timing: This is a major critical factor to the success of many businesses.  Gladwell highlighted this issue in his description of several major companies and their founders.  In each case, the founders devoted countless hours to learning.  Plus, they developed the right culture, but being in the right place at the right time made the difference in becoming a huge success.  This has been the case in countless companies.  Sometimes, the entrepreneur has an idea that the timing is right, but many only realize long after after the success of the company becomes apparent.

Picking out the right time for a business venture is not something that most people will do well.  There may be a few things to look for.  As examples, consider 1) a new field emerging where you are the expert in the field, 2) a market need where you are the expert in the market with an ideal product, or 3) just being there when a big customer needs what you have. 

Timing is essential to most endeavors.  The entrepreneur can learn more about major successes and what lead to them.  In this way, it is possible to at least develop ideas that may have more chance of success.  But in the end, it still comes to being in the right place at the right time.

  Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon 

Wednesday, August 10, 2011

Entrepreneurs’ Giveth & Entrepreneurs’ Taketh Away

You work so hard.  Everything you do is geared toward building the startup.  Time, contacts, money, creativity / imagination, and energy go into your new creation.  You give it your all.

Most entrepreneurs may have experience in their field, but some lack the managerial experience to know what things work and what things don’t.  Many steps you take are based on what you have learned in the past and/or what you believe is right.  Your desire is to create a culture that fosters improved business.  In many cases, the employees are also friends.  Why not, it is “your” creation! 

Sometimes, entrepreneurs get caught up on company ownership and treat it like personal property.  Sometimes, what seems like the right thing to do is NOT the right thing.  The point is that with all the work that goes to building a business, a single wrong step, wrong message, comment given at the wrong time or way, or a wrong action can set your company back.  It can take a long time to return to normal if it ever does.

Two examples (the names are withheld to protect the guilty):

1.     A research facility was making a transition that would result in a major management changes.  Employees were to be repositioned and layoffs were likely.  A senior supervisor told his young managers to not divulge the info to the staff.  One of the young managers had a close friendship with one of his subordinates and believed the subordinate could keep a secret.  In addition, the young manager knew the friend was going to be directly affected and wanted to protect the friend.  So, the young manager spilled the beans! 

It took all of 3 hours for a 100 person division to learn the secret.  Many were speaking with higher-ups in the company by day 2.  The anger and disruption in business went on for 3 months.

When the young manager went to his boss to explain the issue and apologize to his superior, the superior was very understanding.  He realized the friend relationship and desire for the young manager to do the right thing by his friend.  But he provided the following advice:  In the future, NEVER provide life changing info until the day of the event.  If you are going to make cuts, it is better to do it all at once. Get it over with, and deal with the aftermath in a shorter period than the 3 months of hell we just went through. After the announcements, work to retain those remaining employees that may still be unhappy.”

2.     Situation 2 is a bit different.  A different senior manager decided to divorce a wife.  He selected an employee to become the new wife before announcing the divorce intent to the current wife.  This was further complicated by managing all aspects of the divorce and new relationship while at work.  In addition the employee future wife was promoted at work.  The new wife and employee constantly reported back on employees to the senior manager creating great deal of anxiety, animosity, and lack of trust among all employees.  In addition, the new wife had to interact with the public, but was never trained to do so.  The position of the new wife was a rather important one!  Without going into all the issues and background, the situation caused a difficult working environment for all employees.  It also resulted in a major drop in the stock price!  The advice that came from a mentor to the company was (pardon the language): “You don’t S… Where you eat.

Take great care with all your actions in your startup. One slip-up can have a long lived impact on your business and morale in the company.  A few thoughts:

·       Don’t think you can relay messages to people and have it kept a secret (it won’t be).

·       Life changing events may are best relayed to the team at the last minute.

·       Don’t give mixed messages to your team.

·       Keep your friends close, but when it comes to business, treat them like everyone else.

·       Don’t act or speak like you are the greatest thing since sliced bread.

·       Keep your personal business at home.

·       Don’t mix family issues with business issues.

·       Think carefully before you act.  One wrong step will cause you a whole lot more work than you ever dreamed of!

There is too little space to do justice to more examples or provide more detail on the ones above.   The sole purpose of this article is to suggest you proceed with caution when dealing with a wide range of issues.  Don’t Taketh Away” from your Startup.

  Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon 

Tuesday, August 2, 2011

Are You Involved or Committed in a Startup?

Entrepreneurs in startup companies may spend years working before the company becomes financially stable or a reasonable exit turns up.  The entrepreneur is the one that devotes significant time to attract advisors, mentors, employees, board members, and investors. Each of these company participants will have their own attractions and interests in the company.  Everyone will be involved in the business with some having higher levels of involvement and others not so much.  However, not all of the company participants will be committed to the company.  One hopes the employees and founders are committed but sometimes this is not the case.  

So what is the difference between being involved and committed?  Think of having ham and eggs for breakfast.  The chicken is involved in your breakfast. But that pig, well he is committed!

Most employees will have a need to maintain their salary. They may have other interests that can dilute their attention to the company.  They may have a heavy involvement, but commitment can be difficult.  For example, employees that live day to day on the salary will leave if they see finances become an issue for the company.  This is only natural, they have to protect their family and they do not get the same incentive as the founders for the company success.  They also are not likely to have the same resources to survive in lean economic times.

Your investors and board members certainly have other obligations.  They are not likely ever going to be fully committed to the company.  An investor may participate in several companies hoping for one big success.  Board members may sit on several companies’ boards.  All of these important company participants are going to be heavily involved, but none are likely to have the same level of commitment as the founders.

As the founder, it is essential you are committed to the company.  Things that take your attention away only dilute your efforts in the company.  Founders are often distracted by family issues, other business interests, hobbies etc.  Many with these distractions start to lead to potential issues developing in the business.  The issues may be fixable later, or may not be fixable ever.  When the founder spends time on areas not related to the company, sometimes the company loses out; for example, timely decisions may not get made, errors are missed and not fixed, staff may miss critical project timings, projects may get dropped, and costs could get out of hand from lack of monitoring, etc.  Keeping ones attention on the business is essential to reduce errors and increase chances for success.

It is the commitment that makes the founder strives to succeed and work long hours.  A committed founder will seek every possible means of making the startup a success. A founder with more than one startup will not have the level of commitment toward each company and is likely to slight one for the other when difficulty comes.  The singular company commitment is essential to ensure the founder give the business everything and every chance to succeed.   It is not enough to be involved in your startup.  You really need to be committed if you want to enhance the chance for success.

Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon