Venture capital

Sand Hill Road - Credit Mark Coggins wikipedia

Corporate Venture Capital – an Acquired Taste for the Discerning

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Introduction

Before I start here is a disclosure. I have now been involved in eight start-up companies as a manager or founder, six as CEO, with exits valuations ranging from zero to a listing on the NYSE. In addition I have made many more investments as a venture capitalist.

Whilst raising funds for start-ups I have, on many occasions, taken investment from corporate venture capital groups, including Intel, BASF, Applied Materials and LG Display. In addition, as an institutional venture capitalist I have co-invested with a bunch more corporate venture capitalists.

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Credit: Lumapartners.com

Types of corporate venture groups

In my experience there are three extreme forms of corporate venture capital groups:

1. Those driven purely by financial return

2. Those driven purely by ‘strategic’ returns to their operating organizations. ‘Strategic’ means that an operating group of the corporation in question has serious interest in working with a start-up, or licensing and/or buying its technology, or even acquiring the start-up at some stage

3. Those driven solely by marketing and publicity outcomes
In reality, most corporate venture groups fall somewhere in between the lines; each and every corporate venture group could in principle be positioned as a dot on a three-axes ‘radar’ plot.

My impression is that, in the current era, corporate venture seems to be more biased towards strategic interest or marketing interest and not so much on financial return; although this is difficult to monitor since most corporate investors do not disclose their investment thesis, sometimes because they haven’t even articulated it to themselves.

In principal, corporate venture groups should tailor their investment choices, the investment management models, and the choice of management staff to their specific investment thesis (i.e. the relative degree of strategic versus financial versus publicity motivation), and this is where some corporate venture groups get it horribly wrong.

In addition many corporate venture groups are continually changing strategic direction. Sometimes they even go out of existence only to reform later on. As an outsider it can be very confusing to watch and this constant change doesn’t engender any sense of confidence in these groups as ‘stable’ investors.

As an entrepreneur one of the wonderful things about institutional venture capitalists is that, whilst they don’t always behave in ‘good’ ways (at least from an entrepreneur’s perspective), they pretty much always behave in predictable ways. The same cannot be said for corporate venture capitalists.

Those last few paragraphs sound a little negative, so I would like to go on record and say that there are some fabulously professional corporate venture groups that are a dream to work with.

For example, Intel Capital and the Applied Materials Venture Group, both in Silicon Valley, have been plying their trade for decades and can offer a very amenable experience to the entrepreneur, if somewhat different to institutional venture capital.

The key is to be aware of those differences.

Now I would like to go out on a limb and suggest that the high-quality corporate venture groups are in the minority and the majority of corporate venture groups are a much riskier proposition as a source of capital.

Why so? Well many corporate venture groups are quite young and haven’t yet been through a few cycles of investment whereby they hopefully engineer out many of the inefficiencies in their investment model. Even some of the older groups seem to be able to ‘forget’ their hard-earned lessons when they go through ‘restarts’ associated with corporate restructuring.

Being an entrepreneur in a tech start-up is all about having a great idea, lots of capital, great enthusiasm and luck, a ton of start-up experience, deep industry knowledge and also the ability to reduce all unnecessary risks.

In this context corporate venture capital is often considered an unnecessary risk, not just by entrepreneurs but also by institutional venture capitalists when looking at co-investing in deals with corporate venture capital groups. Given this I often wonder why startup companies ever take corporate venture funds.

There are three simple answers:

1. They don’t know any better, or
2. They have no choice or,
3. There are overwhelmingly good strategic and/or operational reasons to work with a specific corporate venture group that sufficiently offset the implicit negatives

They don’t know any better

I am sure that many readers have seen inexperienced entrepreneurs that are very excited to have done a seed round of funding with a large corporation only to find out that the this funding ends up choking any opportunities for the start-up.

I won’t labor the point other than to say that the inexperienced types tend to find each other in the venture capital world. And it rarely works out well.

They have no choice

There are two types of companies that may have no choice but to accept corporate venture capital.

Start-ups in many of the older industry segments have for some time struggled to find institutional venture capital support. Primarily this is because average returns on investment in these industry sectors do not warrant institutional venture capital investment.

This is a reflection of a number of factors including:
1. These are low-growth and mature industries
2. The products in these sectors have relatively low margins
3. There are relatively fewer opportunities for new platform technologies and the customer base can often choose to simply ignore any revolutionary changes
4. There are low multiples for M&A transactions and IPO’s, and
5. The start-ups in these sectors typically have high capital requirements and long times to exit.

In contrast, Internet and Smartphone App startups, by way of example, have few of these problems and are now very much the focus of mainstream venture investment. In these and other sectors there are higher returns that justify institutional venture investment and this fact exacerbates the problem of getting investment into older industry sectors.

However I would note that whilst being unfashionable and of lower return, good technology companies in older industry sectors sometimes have a less facile operating environment with much less competition.

With an informed and experienced corporate venture team I would argue that older industry sectors can sometimes offer an interesting alternative (as measured by risk and return) for an entrepreneur when compared to the current over-crowded and clustered institutional venture sectors.

Another reason why companies might have no choice but to accept corporate venture capital is that they are operating in odd geographies (like Australia and most of Europe, for example).

Because of the poor venture capital deal flow in these places (the good deals go directly to Silicon Valley) and the consequential absence of sufficient institutional venture capital, there is often an opportunity for corporate venture groups (which tend to be less scared of foreign investment than institutional venture capitalists) to pick and choose investments in these geographies.

There are overwhelmingly good strategic and/or operational reasons to work with a specific corporate venture group

Sometimes a corporation is, for example, so well placed in a market that they offer the very best market partner or even thesole exit opportunity. In these cases it can make good sense for a start-up to work with the venture capital group of the corporation, so long as there are experienced managers on hand to minimize the downside risks of such an involvement. Even so, the question should always be asked as to whether an operational agreement can be done with the corporation in the absence of a corporate investment deal.

Working with corporate venture capital

If, as a CEO of a start-up, you find yourself compelled to take money off a corporate venture capital group for one or more of the reasons (as listed above) then here are some simple guidelines (in no particular order) that should be considered that may help to reduce any unnecessary risks to your business.

1. I believe that the primary interest of a corporate venture capital group should be a strategic interest because this is where they have an unfair advantage (e.g. market presence and technology awareness). And if they don’t have this then why take their money?

2. Sometimes, just sometimes, the market presence of the corporate group is so overwhelming that investment by their corporate venture group is seen as compelling due diligence into the opportunity. This can help in getting co-investors on board. Often however, institutional venture capitalists can be very nervous about the idea of co-investing with corporate venture capitalist, especially ‘global’ companies without many years of experience investing through a Silicon Valley office.

3. It is always good to understand how a corporate venture group measures the ‘performance’ of its corporate venture fund. Is it purely based or IRR, or is this offset by ‘strategic value-add’ to the corporation? Are the corporate venture managers on a salary with a bonus or is there profit share system in place? These things really matter and you should know the answers.

4. It is always worthwhile understanding the experience base of the corporate venture people you are talking to. I have met people that have three years of work experience in a corporation as a junior finance manager followed by an MBA, where after they have walked straight into a corporate ‘VC’ role; clearly they will make mistakes. On the other hand I have worked with corporate venture managers that have done the hard yards as associates and principals at institutional venture capital firms; these people have bothered to learn the venture capital trade and their corporations have respected that venture capital is a trade.

I like to make an analogy to blue water yacht racing – you can read all you like about venture capital and blue water yacht racing in text books but in neither case will it help you stay alive in the water without also doing the years of apprenticeship.

5. Your company should be developing new ‘platform’ technologies, rather than new products off an existing platform. I believe that operating corporations are best placed to develop new products off existing platforms but, due to internal processes, are often less able to fund risky new development of platform technologies, and indeed often do not have R&D people with the required pioneering mindset. Whilst not their only role, this is the gap in the market that start-ups fill on behalf of corporations.

6. Any corporate venture investment should have strong support from within the operational groups of the investing corporation. Preferably this includes C-level support, and is based on alignment of the start-up company’s technology and the current strategic intent for growth or profitability of the corporation. Within the corporation it is a good idea for there to be an ‘acquisition’ thesis. Although this rarely works exactly to plan, it can be a living document that helps create and maintain internal support for a strategic investment.

7. Companies that receive corporate venture investment must have more exit opportunities other than acquisition by the single investing corporation. That is, they must be ‘real’ companies with great management, and not just spin-out R&D groups tied to the mother-ship. In fact the more tension there is between an acquisition by the investing corporation and the start-up’s efforts to create higher-value alternatives for itself, the faster is the development of the technology, products and sales. It is a good problem to have.

8. As ever, a start-up should not take investment off a corporate venture capital group unless the corporate venture capital group has the financial capacity to be there for the whole journey. And planning for the journey to exit must include delays and detours and extra rounds of funding, as is always the case for start-ups. Associated with this, in the older industry sectors it is often the responsibility of the lead corporate investor to round up interested co-investors, including other strategic investors, VC’s and venture debt providers.

9. For a start-up, taking money off a corporate investor can create all sorts of issues that can possibly diminish enterprise value at exit. For example, the relevant market might see the start-up as ‘aligned’ to the corporation and be less likely to work with the company as a true independent supplier. Indeed this issue of alignment can lead to much fewer exit opportunities in an M&A scenario.

10. Also, competing corporations often do not co-invest in a start-up of joint interest, and this can lead to fewer funding opportunities for the start-up.

11. By working with start-ups, corporate operating groups often risk IP ‘contamination’ which also reduces alternative exit opportunities and exit value for the start-ups. Contracts and investment pricing must be well managed to offset this risk.

12. Often investing corporations want first and/or last rights of refusal on the sale of the start-up or its key assets. This reduces alternative exit opportunities and should be avoided at all costs.

13. Another issue is the continuity of the investment manager role in corporate venture groups. All too often, three years into a deal a venture manager at a corporate venture group simply changes jobs or leaves the corporation altogether. This is a serious pain in the butt for the entrepreneurs and institutional venture capitalists because it takes quite some time to get boards to be functional and trustworthy. If this change of personnel happens at a critical moment, e.g. a round of funding or an exit, then it can have serious consequences.

14. Related to the last point I have had experiences with corporate venture groups where because of a restructure, or a change of strategic interest, or change in investment managers, or even a change in lawyers, it has simply been impossible to get a signature from the corporation. This can be extraordinarily frustrating when, say, a round of funding is being held up. Do not believe any guarantees by corporate venture groups that this will not happen; if they offer such a guarantee ask them for a ‘power of attorney’ in the instance they won’t provide a signature in a certain timeframe. Of course they will never agree to such a thing!

15. A key strategic issue that corporates need to understand is that corporate venturing only works when they themselves are developers and vendors of technology solutions. Corporations that are simply users of technology usually do not have the appropriate insight to start investing in alternative technologies in their own supply chain. For example, Oracle is well placed to understand the market potential of a new data mining technology, whereas one of Oracle’s customers, say a large supermarket chain, while capable of being enticed by a new data mining opportunity certainly does not have the skills to understand the risks of investing in the same. They will invariably subtract value from the investee – there is no neutral impact on startups by investors!

16. A good corporate investment group has a specific set of policies for dealing with start-ups, which also includes an investee education process. Ultimately it is simply a matter of ensuring that any lower returns to the founders of startups (by association with corporate investment) are off-set by lower risks of failure with more guaranteed, if lower, returns. Another benefit of upfront education and communication on these complex issues is time saving; what needs to be avoided, for example, is 6 month negotiations over simple supply agreements where matters such as IP sharing become sticking points. After ‘shareholder behavior’ and a shortage of capital, ‘wasted time’ is one of the greatest risk factors for start-ups.

17. A good corporate venture group needs to ensure that it is in ‘control’ of the relationship between the start-up and its own corporate operating groups. The operating groups will naturally try to ‘tie-up’ the start-up they are working with, using all sorts of complexities, such as IP contamination, exclusive license agreements, tough financial terms and the like. On a deal-by-deal basis this may seem like good practice, but averaged out over a few years it creates an environment that experienced CEOs and founders (who make these opportunities ‘real’) avoid altogether. It is really up to the corporate venture groups to create a perceived environment where start-ups are treated well, and where the balance of risk and return is for some deals equivalent to or better than the institutional venture capital sector. Rather unfairly, it takes years to build up a reputation as a corporate venturing group that is worth working with, yet one sour deal , say where a corporate operating group has behaved badly, can trash that reputation overnight in the incredibly networked entrepreneurial world.

18. A normal investment round for any start-up is effectively a two-party negotiation between the common stock holders and the participating venture capitalists. However if you introduce a corporate venture capitalist into the mix you then get a three-party negotiation because corporate venture groups have different needs and goals to institutional venture capitalists. An extreme example is where a corporate venture group wants a start-up company to execute a Covenant Not to Sue, or a first and last right to acquire the company, or some market-focused operating agreement. Each of these reflects a transaction of considerable value and hence it is unreasonable to ask a participating institutional venture capitalist to pay the same price per share as the corporate venture capitalist that is insisting on these side benefits. If and when this happens you can expect months of wrangling before a deal is closed.

19. There is a type of corporate venture groups that I think should be especially avoided and these are the ones that solely have a marketing or publicity interest. They are quite easy to spot. First they typically have super-small ‘funds’ (they actually usually invest off the corporate balance sheet) of say $5-20m. Secondly, they tend to be companies such as supermarket chains, bank or telcos that are users of technology and not suppliers of technology solutions. The reason they invest is usually to generate local publicity. Rarely do they offer any strategic value. These small corporate venture groups can act to slow down a company’s growth via offering only small seed funding rounds – in our fast moving world even 6 months of delayed capital spend can spell the difference between success and failure. In addition, without relevant venture capital apprenticeship the investment managers in these ‘funds’ can be guaranteed to distil the worst of the behaviors described in this article.

In conclusion, to entrepreneurs looking at corporate venture as a source of funds I would say three things. Firstly, there are good and bad corporate venture groups out there and it’s worthwhile checking the quality of the one you are about to deal with. To do this you simply talk to other entrepreneurs that have taken money off a specific group. Secondly, you need to understand their investment thesis and strategy, and be comfortable that is sufficiently aligned to your company and also to the interests of the other investors. And finally, keep cycling through my ‘cheat-sheet’ of critical issues as listed above to see the ‘gotchas’, either before you do a deal or after you have their money.

Or, you might just reconsider the idea altogether.

Ian Maxwell

 

Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

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Schrodinger’s kangaroos

VC/Advisors, ,

Sometimes I feel like an eskimo in snowstorm; there aren’t any like-minded souls out there…

This from the Business Insider “The association which represents Australia’s venture capital and private equity firms has come out swinging over today’s Commission of Audit report …AVCAL is worked up because one of the seven bodies the commission has marked for abolition is the Innovation Investment Fund. While the other program AVCAL was hoping to sneak through unscathed, the Commercialisation Australia program, also made the grants to be abolish list.”

Well I have a different view entirely. I think that getting the sick, sick patient (the Australian tech sector) off the drip will either force the patient’s immune system to kick in and we will see a recovery. Or the patient will die and leave room for some new organism to thrive, undistorted by the sins of the past.

I have documented the 30-year failure of government investment in venture capital. Seriously, did they expect the government to spend another decade in attempt to achieve the record of the longest failed experiment in the global history of all experiments in any field of science, technology or business? Actually I think they already have the record!

Just as an aside the longest successful experiment in science, technology or business is also Australian. It was started in 1927 at the University of Queensland. It’s just pitch dropping very slowly from a funnel. Since the experiment started there have been 8 drops of pitch of which only a couple have been observed. Which begs the question did the others really fall? So you see, it’s not just an ignoble experiment in stupidity but a philosophical experiment! Who would have guessed.

I guess the government, directly or indirectly, sponsored both programs, the longest successful and the longest failed experiments in science, technology and business. Which is in itself an interesting philosophical puzzle. Why us?

Commercialisation Australia (CA) on the other hand has had only a brief existence on this planet. It was introduced by one of the previous Labor governments (probably Rudd, after the magnificent 2020 Summit) and pretty much replaced the old COMET scheme. Somewhere in their makeup both of these organizations started with the assumption that (a) startups companies in Australia have great ideas, but (b) our entrepreneurs are babes in the woods, and therefore (c) the COMET/CA selective input of time and money will fix all of their problems and they will go onto to becomes the next global technology giants. Yeah that worked, not!

Whereas I could stomach taking money off COMET (and there is no reason not to take free money off the government if it is on offer) I could never get myself to seriously try with CA. There were simply too many hoops to go through and too many conversations with patronising ‘consultants’ advising me on how to run my startups. Worst of all was the weirdness in the selection process; you had to simultaneously prove that you deserved and needed the money but couldn’t get it off anyone else, but that you had tried. This was some odd version of Schrodinger’s cat in a box experiment, once again proving our government doesn’t mind sponsoring philosophical experiments in the guises of science, technology and business.

Well in this instance, my friends, the cat is well and truly dead!

Photo by bugflickr

 

 

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Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as a partner at Zetta Research and an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

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Heading to Silicon Valley to raise capital in 2014? Here is what you need to know.

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Inna Efimchik

Inna Efimchik

Inna Efimchik is a Partner at White Summers Caffee & James LLP a Silicon Valley & San Francisco based Law Firm and specializes in assisting emerging technology companies in Silicon Valley and entrepreneurs seeking to establish themselves in the Bay Area. Inna can help with incorporation, financing, and licensing services as well as general corporate counseling.

If you are traveling to the Silicon Valley to raise capital for your startup from abroad, you can save yourself a lot of time and make the trip more efficient by preparing thoroughly and doing your homework before the trip.

Inna offers a free 1/2 hour consultation to foreign entrepreneurs coming to the Valley, you can contact her via the form at the bottom of the page.

Here are some things that should not be overlooked:

The Right Time to Fundraise in the Silicon Valley

Silicon Valley is a fantastic place to visit almost any time of year. We have great weather here year-round, many tourist attractions within a stone’s throw of one another, and fantastic sights for the nature enthusiast.

But if you are planning a trip to the Silicon Valley with the goal of raising venture capital for your foreign-based startup, to avoid disappointment, set the right expectations, and make the most out of your trip, consider whether your startup is primed and ready for this step.
San Francisco Sunset District - Credit SF Brit http://www.flickr.com/photos/cnbattson/

San Francisco Sunset District – Credit SF Brit http://www.flickr.com/photos/cnbattson/

Ready for U.S. Fundraising

The best time for a foreign startup to come to the Silicon Valley to raise venture capital is when it can make the following statements (truthfully):

  • We raised a small seed round of capital with a local venture capital firm and angels
  • We have publicly launched our product in our country
  • Our product has gained significant traction in our domestic market
  • We are ready to launch our product on the US market
  • We are opening an office in the US that will be handling US operations and marketing
  • Our management team has already relocated to the US (or is relocating to the US within 3-6 months)
  • Our CEO reads, writes and speaks fluent English and is able to present our company to US investors, strategic partners, and clients in a clear, competent and confident manner.

Almost there

If a startup meets some (maybe 4-5) but not all of the criteria on the left, it does not mean that the founders should not come to the Silicon Valley to fundraise. But it does increase the likelihood that this is going to be the first of several trips. A startup at that stage may still be able to successfully raise capital from Silicon Valley VCs, but it may easily take 6 to 12 months or longer and multiple trips to get to a term sheet.

Raising money in the Silicon Valley is difficult, even for companies that fit all of the criteria above. So a company that does not, has a higher hurdle to overcome.

Still, I believe the preliminary trip, if approached correctly, with due preparation, forethought, and the right expectations, can be instrumental in laying the groundwork for a future financing by giving the founder an opportunity to establish contacts, by growing the founder’s professional network in the Silicon Valley, and by clarifying areas of improvement in the startup’s fundraising position.

More work to do at home

A startup that either has not launched a product, or has launched a product but it has not seen significant adoption domestically, and that has not received support from its local investors, has more work to do at home before venturing out to fundraise internationally. That is not to say that such startups should not attend international conferences or take business development trips, whether to the Silicon Valley or elsewhere. I just think it will be more productive to realize that it may be too early to be fundraising abroad in earnest, so the trip, if taken, should have other purposes and expectations attached to it in the founders’ minds.

The Chief Executive Officer

To state the obvious, the right CEO makes the difference between a startup that gets venture capital funding and one that does not. As we said above, to be successful at raising capital in the United States, the foreign CEO has to have fluent written and conversational English, though he or she may speak with an accent and many do. The CEO must also have the personal and business skills that make him or her a good person to represent the startup in investor meetings.

But what if the CEO does not have good English? Unfortunately, neither engaging translators to assist in pitch meetings, nor hiring U.S. promoters or U.S. investor relations specialists to help with fundraising, actually works.

Ultimately, the investors have to believe that the core team has what it takes to succeed, and if the investors have a language barrier with the CEO, they will simply not have sufficient basis to form that belief. The solution is one that is true for all companies, local or foreign – if the CEO is not the man (or woman) for the job, find a CEO who is!

In startups, one of the founders is the CEO by necessity. Sometimes it is the right fit. And at other times it is not. Sometimes it is the right fit for the country, where the startup is based, but not for the U.S. Any company that hopes to be successful must recognize wherein lie its team’s weaknesses and fill them with new hires. If the current CEO will not be able to fundraise successfully in the U.S., the startup should entertain the idea of recruiting a U.S.-based CEO or another CEO in their country with solid “western” experience.

In that situation, the current CEO can take another title, whether it is President, Chief Technology Officer, Chief Financial Officer, or whatever else best fits his or her strengths. Unfortunately, relinquishing the helm can be a major pain point for founders. I am sure some of my readers are wincing as they read this advice.

The bottom line

If the founders of a startup believe they absolutely must raise capital in the United States, and if, after honestly assessing the strengths and weaknesses of the current team, they realize that they do not have the right candidate among them for the job, then they have to reconcile themselves to the difficult reality that such candidate must be found elsewhere.
The same, incidentally, goes for filling any other holes that stand in the way of a startup’s success in raising capital in the United States – these holes must be (a) identified, (b) evaluated, and (c) resolved, preferably prior to the founders investing very heavily into their U.S. fundraising efforts.
However, it may also be the case that, despite some initial flirtation with the idea of coming to the United States to raise capital, the founders will ultimately decide that their chances of raising funds domestically, or in Europe, or in Asia will be better than in the United States and will come at a lower cost (emotional, financial, temporal).

There may be a lot of investment capital aggregated in the Silicon Valley, but there are oh so many contenders from all over the world all vying for it!

Preparing for the Trip

Research

Before your trip, sign up for startup networks, groups and mailing lists, to receive announcements about upcoming events. You should know which venture capital firms and super-angels are investing in your space. You should research and consider which strategic investors you should target, if any. Based on your research, prepare a list of 10 to 20 people that you’d like to meet while you are here. This list is aspirational, so if you do not get the opportunity to meet all of them, you have not failed.

LinkedIn

LinkedinCreate a LinkedIn profile, if you don’t already have one. Connect to me on linked in here. If you have one, check to see if it’s time to review and update it. This is your business resume. Most professionals rely on it!

Don’t be lazy – take the time to write-up prior projects and experience, your education, and anything else relevant to what you are doing and to who you are now. This is your chance to tell people what you want them to know about you!

Note that LinkedIn is also a great place to do your own “diligence” about the people you’ll meet while networking, through introductions, or otherwise.

Video Presentation

If you have the resources, create a short video teaser and post it on YouTube or Vimeo for easy sharing with new contacts. A few excellent examples are below. Notice how effective it is if the teaser can demo your product or service. A picture is worth a thousand words. And a video is worth at least a thousand pictures, charts and graphs.

http://www.youtube.com/watch?v=RHnUSKIULbs

http://www.youtube.com/watch?v=0sUBjIzYv6k

Videos work well to get you a foot in the door (not seal the deal for you). Before an investor takes the time to read your executive summary, in fact, before he even makes the decision about whether it’s worth his time to do so, it is helpful if you can get him excited (or at least curious) about your product or service.

The way to do it is by offering information in an easy and fun format – video – that appeals to the viewer’s emotions, not just his intellect.Executive Summary / Presentation. VCs don’t read business plans.

They just don’t have enough hours in the day to screen companies based on their business plans, and, frankly, with business at an early stage, a business plan reads more like astrological predictions than fact.

Executive Summary & Pitch Deck

Still, if you are talking to an investor at a networking event, or have been introduced to an investor by email, he will want to see something in writing about your company. You will be expected to send an executive summary (a one-pager that introduces the investor to your company and piques his interest) or, more frequently these days, an investor slide deck (8-10 PowerPoint slides that serve the same purpose but are easier on the eyes).

Instead of trying to work with your team back home when you are already here, faced with a time difference and time pressure, prepare this before you come. You may have to adjust it based on the feedback you receive from investors, but if you have a solid draft, it will make your life easier.

A really well-made executive summary or deck can set apart your startup from the rest and give you a fighting chance at a more involved look from the investor.

You can work with designers and advisors to help solidify your message in your materials. But do not hire someone to write them for you. You have to own your materials, and by that I don’t mean the legal sense of ownership, but in the sense that you stand behind each word in that document and, if prompted, can expand in verbal or written format on any of the points made in it!

Ed: I like Pollenizers Pitch Deck http://pollenizer.com/universal-startup-pitch-deck & http://bestpitchdecks.com/

U.S. Phone Number

With your Google account, you can get a free Google Voice number and set up call-forwarding from that number to your temporary U.S. number.Google Voice also offers voicemail functionality. Make it easy on your callers – record a greeting with your name and the name of your company, so that they know they reached the right number.

Credit Cards

The most common and convenient payment method for most things that you’ll need to buy on your trip will be a credit card. Every online purchase will require it and some merchants (like car rental places) will take your credit card number as a security deposit, even if you pay cash.When getting ready for your trip, make sure there is money in the account tied to the card that you are taking with you. To really play it safe, take several credit cards tied to accounts at different banks. It is best to call ahead, and let your bank know that you will be in the United States. Sometimes banks will suspect identity theft and block your card, if there is unexpected activity on your card in a foreign jurisdiction. Nothing quite makes travel so uncomfortable, as having your credit cards lock up, when you are relying on them as a primary payment method!Driver’s License. While you are visiting California, you are permitted to drive with your valid foreign license. Make sure to take it with you, as you are packing for your trip, and that it does not expire during your trip (rendering it no longer valid)

Basic Principles of Effective Networking in Silicon Valley

If you have meetings with investors and interesting contacts already lined up for your trip, then you may want to skip the networking events altogether. They are a lot of work and will really wear you down. But if you are still building up your network and need to fill out your trip calendar, networking events are a great way to get exposure to a lot of people fast.

Because networking is hard work, if you are going to do it, you might as well make the most of it. My suggestions are based solely on my own personal experience and reflect either what has worked for me or my observations of the behavior of others. There may be other effective networking tactics, so if you are feeling anxious about this, read a few more articles (or books) for a deeper dive.

Set the Right Goals

Make sure you set the right goals and expectations for yourself when you go out to network. Chances are that you will not meet and win over an investor at a networking event (unless the event is a pitch competition than you win, and frequently not even then).

What you should really be hoping to do is to ingratiate yourself with three to five well-connected individuals, who will make introductions for you to people in their network. Note that those people that you get introduced to may not be your investors either.

The goal of networking is to grow your network because you never know where your investors, customers, or even future employees may come from. Approach networking with an open mind, and good things will come!

Business Cards

Business cards are cheap, so stock up and bring enough. Sure, if you run out, you can add the person you are speaking with on LinkedIn during the conversation or take his card and write your name on the back of it. But coming unprepared does not characterize you well, and if there is a chance someone will keep your pretty business card around and will remember about you some time in the future when it could be advantageous to you, you can be sure they’ll toss your info scribbled on the back of their card. LinkedIn is good, but unless you have a stellar memory for names, it can be hard to find contacts. So, personally, I prefer cards. But don’t mistake handing out cards for networking. If you hand out your card like it’s on fire, but don’t cement it with at least 3-5 minutes of solid conversation with the folks you gave the card to, you may as well have thrown it in the trash

Cool Business Card - credit http://cardrabbit.com/cool-business-card-alex-faure/
Cool Business Card – credit http://cardrabbit.com/cool-business-card-alex-faure/

Your business card should be in English and should contain

  • Your company name (and if you have not registered the company, the name that you think you will use)
  • Your name and title
  • Your corporate domain & email address
  • The address of your physical office (if any), and
  • Your U.S. phone number.

Note that you don’t have to spell your name on the card the way it is spelled in your passport. Feel free to spell it in a way that will make it easy for English speakers to read. This will save you time and annoyance, unless, of course, you like correcting people and having off-topic conversations about foreign names, the English language, pronunciation, etc.

Dress to Impress

Startup Bus Tshirt - credit http://www.projeggt.com/project/startupbus/summary/
Startup Bus Tshirt – credit http://www.projeggt.com/project/startupbus/summary/

When you go to events, you want to be memorable, stand out in the crowd. That way, when someone you spoke to for a few minutes wants to introduce you to someone else at the event, he can find you again in the crowd. As with anything, you have to be careful not to overdo this, because if you are too outlandish in your wardrobe, you might be memorable, but it won’t score you any points. The trick is to stand out in a positive way.

At the very least, if you have a T-shirt with your company’s logo, wear that. It may not be very original, but it will be a good conversation starter, and people with a visual memory are more likely to remember the name of your company if it’s written across your chest.

Forget your Comfort Zone

Networking is not comfortable. It would be easy if we could show up at an event, and relevant contacts would line up to meet with us in an orderly fashion. In fact, that’s not what happens at all. You are lucky if you are approached by another networker looking to strike up conversation. More frequently, you find yourself in a room surrounded by small groups deeply immersed in their own private conversations. They look intimidating.

But if you stay within your comfort zone and hover in the corner, waiting to be approached, you will be wasting precious time. So try to make eye-contact with someone in a group, to see if they’ll welcome you to join them, or just shamelessly insert yourself into the group and when there is a pause in conversation, extend your hand and introduce yourself. At a networking event, no one will think worse of you for doing so. Sometimes, the topic of discussion will be so narrow that after a few uncomfortable minutes you will decide to leave to look for another place to park, but the more polite networkers will attempt to integrate the newcomer into their conversation.

If your English isnt perfect you will fit right in.

More than half of the people you will meet at any tech networking event in Silicon Valley will not be native English speakers. Speaking with an accent is very much the norm. So don’t sweat it, and focus on the conversation, not on what you may perceive as your linguistic shortcomings.

Stay Positive

If you want to leave a positive impression, you have to radiate positive energy. If you complain about your suppliers and customers, or put down your partners, employees or investors, it leaves a bad taste with the person you are speaking to. So focus on the positives!

Everyone loves to help people who are already successful, and to whom everything (apparently), comes easily. Be that person!

Keep it light

Keep the conversation light. If you want to make more than a single connection at an event, you will need to move quickly from one conversation to the next. Keep in mind that no matter how passionately you feel about public policy or politics, a tech networking event is not the place to get entangled in a heated debate, whether about the conflict in the Middle East, the shortcomings of the Obama administration, a woman’s right to abortion, the right to bear arms, or U.S. world domination. In general stay away from religion and politics, unless it is to say that you are hoping that the Startup Visa initiative passes, which you won’t get any argument on from anyone here.

Finally, remember to smile! There is nothing so disarming as a genuine smile, so it is going to be your best networking weapon!

Listen First

When you engage in a one-on-one conversation with someone at a networking event, even if you are burning to spread the word about your amazing company, recognize that everyone there has a story.

If you practice active listening – paying close attention to what the other person is saying, reading their body language, asking follow up questions, sharing information that they may consider valuable, and looking for ways you could help – you will find people more interested in your story, and willing to help, whether with advice, introductions, or empathy

Don’t be a salesman

Think about how you feel when you are approached by a salesman. What’s your first reaction? I know mine is, “No, thank you!”

The last thing you want to do at a networking event is to be perceived as a salesman. Instead, you want to be seen initially as someone who is easy and interesting to talk to and eventually, as a good long-term contact.

Followup

You have to follow up, if you don’t want all that networking to have been in vain.

If you promised to send your executive summary, do so within a few hours of the meeting, if you can, and within 24 hours at most. If the person you talked to promised to send you something, follow up with them after the meeting and remind them. They have busy lives, so take the initiative!

When you are networking, you are building up your social capital, so don’t just be dependable when it can stand to benefit you. If you promised a networking contact to send the name of an app that slipped your mind during the conversation or to make an intro to a good web designer, do it.

The greatest value of networking is in the long-term connections that you form. For this reason, strong follow up is essential. Invite contacts that you make at a networking event that you would like to make a more permanent part of your network to meet with you for coffee sometime that week. Almost no one will turn down a coffee offer, unless (a) it’s a VC, or (b) you are perceived as a salesman

Have patience with the process and try to enjoy it! Networking does not produce immediate rewards, but it does pay off in the long-run!

Preliminary Investor Research

Unfortunately, there is no shortcut to finding investors who invest in your industry, in your stage of company, and in the amounts that you need. Finding them requires research, research and more research. However, the better that you know your industry, the clearer it will become to you who the key investors are in the space.

That does not mean you will know every small fund and angel who has ever invested in a company of a similar profile. But it does mean that you will know who the trend-setters are, which investors have a few “hot” companies in your space in their portfolios (your worst and fiercest competitors), and whose investment could take your company to a whole new level.

AngelList

Angel-listAngelList is a popular matching platform for companies and investors. There is even an opinion among some in the community that a startup looking for funding has to have a completed a thoughtful profile on AngelList, as its online resume for investors, of sorts.

But in addition to providing investors with information about your company, AngelList allows a registered user to see past closed transactions and to search by financing stage and amount raised, though not by industry.

Despite the name, AngelList is not limited to angel investments. When I did a quick search for “done deals” over the past three years using the parameters Seed Round with $1-2M raised, out of the first 8 hits, 6 are VCs (Google Ventures, SoftTech VC, Charles River Ventures (twice!), Ecosystem Ventures, and Andreessen Horowitz).

National Venture Capital Association

National Venture Capital Association has a searchable directory, which contains over 400 venture capital firms who are members of the association, and which can be accessed by buying an annual subscription from NVCA ($325).

VentureBeat

Venture-BeatVentureBeat is a wonderful resource with daily articles on deals, such as acquisitions, funding, and IPO. Unfortunately, there does not appear to be a meaningful way to search VentureBeat to show all past deals for companies in a particular space and at a particular stage.

But in the spirit of staying current on technology investment trends generally and in your space in particular, it is worth subscribing to their weekly newsletter. It doesn’t take long at all to scan it for news (and names) relevant to your industry.

Quora

Quora is a popular public question and answer platform. The scope of questions runs the gamut from requests to describe being homeless to product recommendations for new moms.

Many entrepreneurs and investors are active members of the Quora community, making it a very good place to look for investor lists and reviews.

Lists of VCs

 

TechCrunchThe-Midas-List

 

 

 

Business-Insider Medmarket-Diligence

Entrepreneur

Fierce-Biotech

 

The-Funded

 

 

Ed: Where ever possible get an introduction via your network, your chances of raising capital are greatly increased as a referral vs cold calling or email.

Startup & Tech Events

The remarkable thing about the Silicon Valley is that if you wanted to do so, I am fairly certain you could go to a different startup event every night of the week and to some daytime ones on the weekend if you were willing to travel 30-40 miles and did not have very specific criteria for the types of events you were pursuing. When you are only here for a week or two with the goal of meeting as many people as possible, going on an event binge may not be a terrible idea!

Event Aggregators

The first place to start your search for events is on event aggregators. Some of my favorite ones are the StartupDigest, Meetup.com, and Eventbrite. Because there are so many events going on at once, no one aggregator can hope to list them all.

Startup-DigestYou can sign up for a weekly newsletter from StartupDigest that comes out on Mondays and which lists events for the upcoming week with prices (many events are free and most of the rest only have a nominal cost) and cities where the events are held. The list is curated, so the events presented are supposed to be high quality. I would recommend signing up for this newsletter in advance of your trip, so that you can start registering for events ahead of time.

Eventbrite

Meetup and Eventbrite are not picky about the events they list, so you have to make the judgment call. For one, make sure there are many other people attending the events for which you are registering. Also note that a number of events listed on Meetup require you to purchase tickets on

MeetupEventbrite, so pay close attention to event registration instructions!

 

 

 

Accelerators & Incubators

The myriad of accelerators, incubators and co-working spaces in the Silicon Valley are incessantly vying for their spot in the startup ecosystem spotlight. The rest of us are the beneficiaries of their competition and of the well-developed ecosystem, for we have a great selection of events to attend at those venues, whether educational, purely social, or demo-oriented.

Note that inclusion in the list does not constitute a recommendation on the merits of the venue for its primary function as an accelerator, incubator or a co-working space, on which I remain silent. But as far as events go, they are usually open to the public!

 

SV Forum Logo-4colorSV-Entrepreneurs

NestGSV Plug-Play

Parisoma HubbayArea

Founders-Space Startup-Socials

Nextspace

Getting Around Silicon Valley

San Francisco Trolley Car

San Francisco Trolley Car

Transportation needs will vary between travelers. Generally speaking, getting around the Bay Area without a car is difficult, expensive and fairly unpleasant. Fortunately, renting a car is easy, and anyone used to driving in a major city should find driving in the Bay Area a breeze.

Despite this, depending on your meeting schedule, you may not need a car, especially if you plan on spending most of your time in San Francisco. If this sounds about right, scroll down to find out about your options for getting around the city (and about why you’ll see cars with pink mustaches all over town)!

Driving

If you are planning on driving, you can rent a car for the entire duration of your stay or, if you anticipate that parking will be nonexistent or expensive where you will be staying, and you only plan to make infrequent trips by car, by the day.

As long as you have a smart phone and will purchase a SIM card with a local 3G/4G connection, you can save yourself a little cash and go without a GPS (which the car rental places usually offer as an add-on). Using your Google Maps app you will get better driving directions around the San Francisco Bay Area than those offered by many specialized GPS devices.

ExpediaTo find a car for the full trip, you might do a price comparison between different car rental places on Expedia or Kayak, or another similar service.

 

KayakNote that the San Francisco Airport, where you will likely fly into, has the following car rental counters on-site: Alamo, Avis, Budget, Dollar, Enterprise, Fox, Hertz, National and Thrifty. You can check their websites directly and look for promotions.

ZipcarFor shorter car trips you may consider Zipcar, a popular car-sharing service. Once you have a Zipcar account, reserve a vehicle online for as many hours as you think you’ll need. Then pick up the car from the Zipcar lot closest to you (there are many all over the Bay Area). The cost of fuel is included! And if you are running late, you can extend the time of your rental. Zipcar offers a wide range of options, whether you want to travel in style in a fancy BMW or Lexus, need an SUV for extra cargo space, or just need a regular compact sedan.

Taxis

Expect that getting around in a cab around San Francisco, and especially if you venture out of the City into the greater Bay Area (given our distances) will be quite expensive. If you like your taxis and feel comfortable with the cost, Luxor, Yellow Cab, and De Soto are the better-known taxi companies, although there are some up-and-comers, like Green Cab. Check out their websites for phone numbers. Some of them have apps to simplify the reservations process. But the traditional taxi industry is evolving with exciting new companies making a name for themselves.
Lyft-SFUber UBER and Lyft are two well-regarded services that offer ride-sharing services in San Francisco (and UBER does in the Bay Area too). Using an app customers are matched up with drivers in the area. The app estimates and lets you know the fare ahead of time, so that there are no surprises.

Read their Yelp reviews for the raves and the rants, and see if ride-sharing is right for you.

BART

The Bay Area Rapid Transit System (BART for short) is the closest type of transportation in the Bay Area to a major city subway or metro system.

BART’s most notable accomplishment is that it connects commuters from the East Bay (Berkeley, Oakland, and even as far south as Fremont) to downtown San Francisco and travelers to San Francisco International Airport.

BART runs fairly regularly (though nowhere close to the Moscow underground) and usually on time, unless of course, there is a strike, like the one going on now. You can find BART schedule on BART’s website, and there are a number of mobile apps for iOS, Android, and Windows platforms, with real-time updates on train schedules.

A multi-use BART ticket can be purchased from a machine at a BART station. A one-way fare from Fremont to San Francisco is $5.65.

ED: In my experience first time in the Valley jumping on the BART at the Airport and being delivered in downtown was very easy

Caltrain

Caltrain pulling into San Jose - Credit Lucius Kwok http://www.flickr.com/photos/luciuskwok/

Caltrain pulling into San Jose – Credit Lucius Kwok http://www.flickr.com/photos/luciuskwok/

To navigate between San Francisco and the Peninsula or the South Bay using public transportation, you can take advantage of our above-ground railway system, Caltrain.

Caltrain runs in a linear fashion from San Francisco at its north end to as far south as Gilroy. However, expect to walk or take a cab from the Caltrain station to your final destination because public transportation on the Peninsula and in the South Bay is virtually nonexistent.

Unlike BART and the typical subway systems in major metropolitan areas, Caltrain trains run with gaps of 20 to 40 minutes and sometimes even further apart. If you plan to use it, check the schedule ahead of time. You can find the train schedule on Caltrain’s website, and there are a number of Caltrain-approved mobile apps for iOS, Android, and even Windows platforms, that include up-to-date schedule information, which can also be found on the Caltrain website.

A Caltrain ticket needs to be purchased at the station from a ticket vending machine. The price is calculated based on the number of “zones” between the point of departure and the destination (typically between 1 and 3 for most travel within Silicon Valley) and ranges from $3.00 to $7.00 for a one-way ticket.

MUNI

If you really want to go native, within San Francisco City limits you can attempt to travel by MUNI, which consists of the bus system above ground and the light rail below. The cost is $2.00 per person for up to 90 minutes of travel, including transfers. The machine on the bus takes coins and bills, but it does not give change. Once you pay, you will get a fare receipt (a paper ticket), which will state the time when it expires. Make sure to keep your receipt if you plan on making transfers!

ED: For Train Spotters The light rail has a great old collection of trams from around US and the world MUNI with old restored Trams Paul Sullivan seems to have captured most of them here http://www.flickr.com/photos/pfsullivan_1056/

Where to Stay in Silicon Valley

The San Francisco Bay Area is simultaneously a very small and a very large place. Regardless of where you decide to stay (between SF and San Jose), you can, in a matter of one to two hours, depending on traffic, find your way to any meeting or event in the Silicon Valley. On the other hand, if you have a busy schedule, you’ll want to minimize the amount of time spent driving, or in public transit, and maximize the value of your time. For this reason, it helps to stay in or near the hubs of startup activity.

San Francisco

San-Francisco-Evening - Credit - http://www.flickr.com/photos/jdub1980/

San-Francisco-Evening – Credit – http://www.flickr.com/photos/jdub1980/

In San Francisco, the area called SOMA (south of Mission) boasts the greatest density of startups, startup co-working spaces, startup accelerators, startup incubators, and startup-oriented events.

If you are looking to be within walking distance of startup-oriented events each night of the week, SOMA is hard to beat.

Golden Gate Twilight - Credit - http://www.flickr.com/photos/jdub1980/

Golden Gate Twilight – Credit – http://www.flickr.com/photos/jdub1980/

Mountain View

Mountain View is home to Google and Microsoft, and a slew of other tech companies. Naturally, there is a pretty well-developed startup scene in that area as well, with a number of startups events.

Hacker Dojo is a startup community center / co-working space in Mountain View, and Red Rock Coffee on Castro Street in Mountain View is the unofficial startup hangout, where any time of day you can find yourself sipping coffee next to a small group of founders working on their business plan or working out code kinks.

Redwood City

Our office is located in Redwood City, which is on the Peninsula about half-way between San Francisco and Santa Clara. Because of its prime location, Redwood City is starting to really pick up in terms of startup events.

There is a large incubator in Redwood City, called NestGSV, which holds many startup events. One of the larger startup networks, called 106Miles holds its monthly events in Redwood City (as well as in Palo Alto and San Francisco).

Palo Alto

Stanford University Tower -Credit Luis Garcia http://www.flickr.com/photos/luisjoujr/

Stanford University Tower -Credit Luis Garcia http://www.flickr.com/photos/luisjoujr/

Palo Alto is a lively university town (next to Stanford University ) that many startups and VCs are attracted to for its historic downtown feel with quaint coffee shops and a variety of cozy restaurants. Due to the two cities’ close geographic proximity and to a marked difference in ambiance between the two, the VC crowd, when outside the office, can more frequently be spotted in cafes on University Avenue than in downtown Menlo Park.

Downtown Palo Alto at night Credit Salar Hassani http://www.flickr.com/photos/shassani/

Downtown Palo Alto at night Credit Salar Hassani http://www.flickr.com/photos/shassani/

ED: Palo Alto is in my mind arguably the home of Silicon Valley with the birth of Hewlett-Packard just a few blocks from Stanford. For anyone who wants to see history and be inspired this Garage launched a multi-billion business thats over 50 years old and helped launch high tech industry in the Valley.

HP Garage in Palo Alto - Credit wikipedia.org http://de.wikipedia.org/wiki/User:Twam

HP Garage in Palo Alto – Credit wikipedia.org http://de.wikipedia.org/wiki/User:Twam

 

Menlo Park

The famous Sand Hill Road, where the majority of well-known venture capital firms are headquartered, is in Menlo Park. But aside from these renowned neighbors, Rosewood Hotel (featured above), and perhaps Café Borrone on El Camino, Menlo Park has little to boast by way of startup life.

 

Service Providers to Meet While You are Here

Startups that plan to have a U.S. presence will need to build a framework of trusted service providers to serve their legal, accounting, banking, and other needs.

While many of these matters can be handled from abroad, there is nothing like meeting in person with service providers with whom you plan to build a long-term relationship while you are already in the Bay Area.

Legal

Taking your business into the United States means that you will need experts to help you navigate local laws and local transactions.

Although legal services are not cheap, they are an important investment in your startup’s success. You will be relying on your attorneys heavily to guide your actions and provide advice and counseling, so pick attorneys whose expertise you trust and who understand that their role, especially with foreign startups, goes far beyond crunching out forms and pushing paper.

Corporate & Securities

At the very least, you will need attorneys who will document (a) your startup’s flip to the United States, which will be a prerequisite for getting investment from U.S. funds, and (b) the investment itself. These attorneys specialize in corporate and securities work, and you want to make sure they focus on startup work specifically.

Patents

In addition, you may be looking to file patents to protect your intellectual property in the United States, if you have not already done so. While some of the larger firms have both corporate and patent attorneys housed under one roof, many startups choose to work with specialized IP law firms on their patents and with specialized corporate practices on their formation, flip, and financing matters.

Immigration

Finally, it is very common for foreign entrepreneurs to want to meet with immigration counsel during their trip. A foreign management team relocating to the U.S. needs visas allowing them to work here. Frequently, immigration services are provided by small specialized practices and solo practitioners, though our firm has an immigration practice in addition to our corporate & securities and trademark practices.

Accounting

A corporation is a stand-alone legal entity and must file tax returns with the IRS on either an annual or a quarterly basis, depending on its revenues. It must make the filing even if it has no tax liability at the end of the year and even if its losses far exceeded its gains.

The United States tax code is complex, to say the least. A savvy tax accountant can not merely competently fill out the tax forms, but advise on ways to make the business less likely to be the subject to an IRS audit.

Note that in the United States, unlike many other countries, legal and tax services may not be provided by professionals within the same firm, which is why well known international accounting firms like Deloitte or KPMG do not offer legal services in the United States and focus solely on their core area of expertise – accounting.

But a startup does not need its tax accounting done by a Big Four accounting firm. There are many smaller local accounting firms that offer services at a more reasonable price point and more than amply satisfy the requirements of startup accounting.

Note that the word “CPA” after the name of a professional signifies that the individual is actually licensed to practice accounting. While it is not illegal to perform accounting work without having the CPA license, it is important to be aware of the distinction.

Our firm has established relationships with several accounting firms, which we routinely recommend to our clients. A corporation is a stand-alone legal entity and must file tax returns with the IRS on either an annual or a quarterly basis, depending on its revenues. It must make the filing even if it has no tax liability at the end of the year and even if its losses far exceeded its gains.

The United States tax code is complex, to say the least. A savvy tax accountant can not merely competently fill out the tax forms, but advise on ways to make the business less likely to be the subject to an IRS audit.

Note that in the United States, unlike many other countries, legal and tax services may not be provided by professionals within the same firm, which is why well known international accounting firms like Deloitte or KPMG do not offer legal services in the United States and focus solely on their core area of expertise – accounting.

But a startup does not need its tax accounting done by a Big Four accounting firm. There are many smaller local accounting firms that offer services at a more reasonable price point and more than amply satisfy the requirements of startup accounting.
Note that the word “CPA” after the name of a professional signifies that the individual is actually licensed to practice accounting. While it is not illegal to perform accounting work without having the CPA license, it is important to be aware of the distinction. Our firm has established relationships with several accounting firms, which we routinely recommend to our clients.

Banking

A U.S. bank account is one of the perks and requirements of a U.S. corporation. Often, collecting credit card payments through a U.S. business checking account is easier than doing so through a foreign bank.

Since 9/11 and the passing of the Patriot Act, it has become virtually impossible to open a bank account without physical presence in a U.S. bank branch.

With that in mind, even if you have not yet formed a corporation in the United States, you should consider visiting a bank, preemptively. Talk to a bank representative, show your ID/passport, whatever they require, so that when you do form a corporation, you can send your certificate of incorporation and EIN and will need not make a separate trip to the United States to open the account. It is a good way to save yourself some time in the future.

Our firm has established a good relationship with Citi Bank and Comerica Bank.

Local Advisors

Advisors may not be the first thing that comes to mind when thinking about service providers in the startup ecosystem. But they provide an invaluable service to startups and should not be overlooked. The right advisors can make a big difference!

A foreign startup especially might benefit from the expertise of a Silicon Valley advisor if the goal is ultimately to expand the business into Silicon Valley and establish a presence here.

An advisor serves three primary functions: provides advice to founders on high-level strategic matters, makes introductions to contacts in his network, and his name carries prestige.

While you are here, take the opportunity to meet with the individuals you are considering as advisors, to make sure there is a personality fit and that their network is a match for your company’s needs, such that their intros would actually be valuable. Someone who is well-regarded as an industry expert does not automatically make a good advisor to your company.

 

Office Space & More

If your startup is going to have a footprint in the Silicon Valley, you should think about office space for your team, once they relocate.

Visiting a few local accelerators, incubators and co-working spaces will help you decide whether that is the way to go for your startup. Especially if your team in the U.S. will initially be small, there may be advantages to being in an environment with other startup teams, sharing resources and providing sounding board support to one another.

White has co-working space available to our clients for free during their U.S. trip (up to 2 weeks) and for rent for longer periods.

As always we want your comments and experience.

To book your free 1/2 hour session with Inna please fill out the following form

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Tony Brown is the Managing Director of Supertrac a corporate advisory firm with 8 offices across Australia that specialise in business divestments, mergers and acquisitions in the SME market across Australia and New Zealand.

Tony established Supertrac in 1999 and has provided transaction advisory services for hundreds of businesses with a total value of more than $1 billion.

You can contact him at www.supertrac.com or via his linkedin profile

12 Step checklist for the key elements of an effective capital raising proposal.

1. Step into the shoes of investors

Understand how they weigh risk and returns.

2. Outline the business model and where you see the business going

a. Articulate your sustainable strategic advantage. Explain the problem and how your product or technology solves it in a superior way.

b. Articulate a clear vision of what is possible and formalise a plan for achieving it.

c. Explain where the business is now and where you believe it can be.

3. Secure key assets, relationships and IP

a. Protect your IP assets as far as possible. Eg Formalise protection via trademarks, patents etc.

b. Lock down key supplier and licence arrangements that underpin your position.

4. Showcase your track record of achievement (if there is one)

Explain your expertise and how competent you and your team are at delivering.

5. Determine what resources are required

a. Including money, expertise, technology, people etc.

b. Work out how much each will cost and how long it will take to acquire it.

c. Work out how much money you will need in total.

d. Plan to take as little cash off the table as possible, so most or all of the investors’ funds are available to grow the business.

6. Explain in detail what you need the money for

a. Break your goals into discrete stages.

b. Set out key milestones that will be achieved along the way.

c. Work out how much money you need to complete each stage.

d. Break the investment into instalments with drawdowns conditional on achievement of those milestones.

This provides a staged investment plan for the investors and reduces their overall risk.

7. Decide on the overall value of the business with the investors’ funds included

Decide on what share of the business the investors’ funds will buy.

8. Decide on the optimal organisational, legal and financial structure

a. Work out the degree to which you will accept equity or debt, or a combination of both.

b. Also consider loans with options to convert to shares.

9. Decide on the profile of the investors

a. their industry experience

b. financial capacity

c. active or passive

d. strategic fit eg ready-made distribution channel.

10. Set out exit strategies for the investors, including how and when

11. Set out all the above items in an Information Memorandum or Prospectus

12. Engage an appropriate M&A Advisory firm

a. A firm that has the expertise and the resources to perform effective direct targeted marketing on a large scale.

b. A firm that can facilitate negotiations and the process to completion.

 

 

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David-Drake-CEO-LDJ-Capital

David-Drake-CEO LDJ Capital

David Drake is founder of LDJ Capital and The Soho Loft and a fervent Jobs Act Advocate. Opinions expressed here are entirely his own (but I happen to agree with them) Ed: The problem stated by David is in my opinion one of the major problems Australia faces in creating new enterprises and innovation, we have experienced a net migration loss of both inventors and entrepreneurs for much of the last decade, see the article I wrote on Australia’s Net Inventor Loss – a must read for both sides of politics . If Australia wants to be competitive they should look to Singapore who will give you a visa if you have a valid business plan, we should also be stapling a permanent residency visa to every Masters and PhD that our foreign students receive and provide a fast track entry for anyone in the world who has Masters or PhD and anyone in the world who can present a valid business plan. Singapore and others are going to wipe the floor with Australia in attracting the best talent to start new businesses. We need to retain brain capital in the U.S. as the foreign nationals who exit our universities with graduate degrees are currently not allowed to stay. Entrepreneurs return home and end up competing with American companies – removing potential jobs that should be kept in the U.S. Foreign Harvard graduates who partner with peer entrepreneurs are 21% more likely to see their startups exit versus 15% of graduates without a graduate school partner.

Ellis Island

Ellis Island – Credit Ellisisland.org

This statistic suggests something of the value of both collaboration and of the intellectual capital and drive international postgraduate students bring to our economy. Encouraging foreign postgraduate entrepreneurs to stay in the U.S. and build businesses here is a hot topic at the moment because we are facing the start of negotiations in both houses in January around a comprehensive immigration bill that President Barack Obama is seeking. Several reforms to immigration law have been proposed in the last four years. The Startup Visa proposal by Senator John Kerry looked to allow investments of $250,000 by VCs to allow foreign nationals temporary green card visas to stay and build startups in the U.S. These were intended to turn into permanent visas after the startups show at least five full time employed U.S. jobs were created within two years. However, since Senators Kerry and Lugar are both out of the Senate for next term, there’s no stand alone startup visa bill — it is the view of key immigration reform leader, Craig Montuori, that “the Kerry-Lugar Startup Visa Act will almost certainly not be reintroduced in the Senate in 2013.” Another bill proposed by Sen. Jerry Moran (R-KS) and Sen. Mark Warner (D-VA) is the Startup Act 2.0 and it may yet form the final blueprint for change (see summary at end of article). Indeed, Craig Montuori terms the Moran/Warner plan, “the primary bill for startup visa supporters.” The STEM green card program is another program getting a lot of attention. It allows Ph.D. level foreign nationals studying engineering in the U.S. to get temporary visas to stay. The message is clear – immigrants are eager to contribute to our economy. Foreigners and the brightest of those abroad want our opportunities and these bills to be discussed this winter will allow the investor and VC community to gain access to these highly motivated entrepreneurs who want to stay in the U.S. after their postgraduate work is finished. The Commerce Department’s goal is also to attract startups and brain capital from abroad to the U.S. as well as foreign investments into the U.S. The Startup Visa would accomplish both. In his Ph.D. on entrepreneurial success, Hoan Lee at Harvard Business School found that graduate level entrepreneurs that partner up with peer colleagues from graduate school have a 21% likelihood of an IPO exit compared with those that do not (15%). Lee also found that, “Being socially connected to peer venture capital firms and private equity seeking startups leads to more deal flow, larger asset under management and better performance in the inaugural funds of HBS-executive run venture capital firms.” This study was not exclusive to foreign students, but it does make clear the centrality of pairing up potential entrepreneurs with other entrepreneurs and venture capital sources – of social networks – to achieve business success. Stories of bright and brilliant startups that created U.S. jobs (or have the potential to create U.S. employment) but which are lead by foreign nationals who cannot enter the U.S. or who are facing deportation were frequent last year. Ankush Aggarwal is one example of an entrepreneur the U.S. has not retained – even though he is open to holding a U.S. visa to accelerate the growth of his businesses. Aggarwal received his MBA in International Business from Pepperdine University in Malibu, California, lives in Chandigarh, India and regularly visits the U.S. on a business visa. His two internet sites, www.spicylegs.com and www.partybell.com, feature products sourced from the U.S., and almost all his customers are in the US (95%). His company, Northern Planet LLC, has 25 employees in India and one part-time worker in the U.S. Another excluded entrepreneur is Asaf Darash, an Israeli whose U.S. software company, Regpack, is growing rapidly. Regpack employs 19 Americans and raised $1.5 million in financing. Born in Israel, raised in Australia and now seeking to live in San Francisco, Darash used his Fulbright scholarship to spend three years at the University of California, Berkeley while working on his thesis. Even though he attempted to meet the federal government’s requirements when applying for his H1-B visa, a minor error meant that he had to return to Israel last October. As Inc.com’s Eric Markowitz’s article on the case began, “Wait, Don’t We Want This Guy?” The EB5 program has been in place since 1990 and has allocated approximately 10,000 visas annually. The program remains inefficient. The recent EB6 proposal would allow unused EB5 visas to be utilized by creating new criteria otherwise not obtainable through the EB5 program. Significantly, in the last year there were almost 8,000 applicants for an EB5, so that potential reallocation pool is currently quite small, even if the EB6 visa gets off the ground. Mathew Charnay, Managing Director of the International Development Expansion Organization, has led a trend of innovative EB5 visas. He has described the EB5 program as one of a few creative measures implemented by legislation that are at the forefront of redeveloping the economic infrastructure in the U.S. My personal investments continue to develop creative measures within legislation, sophisticated finance and integrated global marketing which are all focused on capital growth and improving job creation within the U.S. economy. With the fiscal cliff having been resolved, the EB5 program continues to be the most viable solution to remaining fiscal uncertainty in the U.S. EB5 application numbers have recently doubled this year and have not reached such heights since 2006, and 2008. With most surges in the EB5 program occurring towards Q2 and Q3 of each year, EB5 analysts like Charnay must continue to implement significant research towards filling voids in far reaching programs like the EB5 as well as continued efforts within legislature. Significant marketing ingenuity of the EB5 program and other fiscally forward legislature is required in order to fill the gaps within the economic infrastructure of the U.S. marketplace. Chart: Rising support in both Houses of Congress for Startup Visa. Source: Craig Montuori President Obama wants a complete overhaul of the immigration program and we are seeing drafting of immigration policies occurring ahead of the opening of the Senate and House of Representatives Jan. 16, 2013. In Congress, immigration discussion occurs within the House and Senate Judiciary Committees. The former will be led by Rep. Bob Goodlatte (R-VA, Roanoke), who is the father of a Facebook employee, while the latter continues to be led by Sen. Patrick Leahy (D-VT), who was the sponsor of the EB-5 provision in the 1990 immigration reform bill. The immigration subcommittee on the House side is not clear at this point, but on the Senate side, it will almost certainly be lead by Sen. Schumer again. Sen. Schumer is also the lead Democrat on messaging and has replaced Sen. Bob Menendez (D-NJ) as the Senate Democrats’ point person on immigration. Craig Montuori maintains, “Comprehensive Immigration Reform is the President’s top priority for 2013, so the White House wants us to contribute to the overall push for Comprehensive Reform. The Startup Act signals support for high-skilled reform within the larger comprehensive package.” He is critical of Senator Menendez for not including high-skilled reform as part of the comprehensive immigration reform bills he introduced, even after President Obama supported high-skilled reform in his speeches and blueprint. “So we need a guarantee from Schumer, as the new architect of comprehensive immigration reform, that we’ll be part of the proposed package,” Montuori says. “Remember that a key talking point for the President on the campaign was that high-skilled immigration reform is an important component that will contribute to American economic growth, towards a 21st century economy that’s built to last.” In a speech on the floor of the Senate, Senator Moran, one of the proposers of Startup Act 2.0, summed up the urgency of the need for the bill – “The future of our country’s economic competitiveness depends on America winning the global battle for talent. The Department of Commerce projects STEM jobs to grow by 17 percent in the years ahead. We have to retain more of the highly-skilled and talented individuals we educate in America to remain competitive in the global economy. Doing so will fuel American economic growth and result in the creation of jobs for more Americans.” David Drake is founder of LDJ Capital and The Soho Loft and a fervent Jobs Act Advocate. Opinions expressed here are entirely his own.

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indiegogo-kite-patch

Why I don’t like Crowdfunding – Debate – Ian Maxwell, David Drake, Mike Nicholls & Andrew Ward

Crowdfunding, , , ,
indiegogo-kite-patch

indiegogo-kite-patch

This article is one of a collection of articles on Crowdsourcing published this week, you can find the others here – Crowdfunding Articles

Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as a partner at Zetta Research and an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

David Drake is a leading equity expert based in New York. He is the founder and chairman of LDJ Capital, a private equity advisory firm and founder of the Soho Loft an events company that produces and sponsors 150+ global events a year on topics such as Crowd Funding, Venture Capital and finance reform.

Mike Nicholls is a Director of a US based Investment Fund, has started and sold businesses and publishes Startup88.com

Andrew “Wardy” Ward is a Sydney based serial entrepreneur who has founded at least 5 businesses including the well-known “3 Minute Angels” and a technology outsourcing business based in the Philippines and is currently preparing a submission to the Corporations and Markets Advisory Committee on changes to the Australian Federal Corporations Act to facilitate Crowd Funding.

This article came about after Ian and Mike were discussing Crowdfunding over a beer, Ian arguing that he didn’t like it and me arguing it was a positive thing albeit with new risks, so we decided to flesh it out and got an International Perspective from David and a local perspective from Wardy.

Risks of Crowdfunding

Ian: There are two broad classes of crowdfunding for tech start-ups:

1. Product funding prior to product development and/or product release

2. Micro-equity funding

I am wary of crowd-funding but very interested in it as an experiment. Most modern tech start-ups are working in areas where the ideas are innovative, but not inventive under patent law. This means it is hard, if not impossible, to get patent protection for products. One issue with seeking crowdfunding prior to actually developing and/or releasing a product is that you give away the innovative idea to other entrepreneurs and corporations, who can then run with the same idea.

Mike: This is true, however the vast majority of startups are execution plays not IP plays, very few of the crowdfunded campaigns have created truly inventive products where a patent would be granted (the Kite Mosquito patch is an exception but this was in the Universities years before) . Patents take 3-5 years to be allowed and generally speaking they are not particularly effective as a weapon to defend a small startup.

Ian: I think we are saying the same thing here. The issue with publicizing your product concept before you have produced it is quite a risk, and the risk is that someone else might say ‘thanks for the idea’ and execute the idea better than you can. This is especially the case when you have no patent protection to fall back on, for either protection of product margin or market share, or to hold up your enterprise value in an M&A transaction.

Wardy: Clearly crowdfunding is telling people about your idea pre-money and pre-product. Yes anyone can then latch on to that idea and then develop it (if they have funds). But these same copiers will not have a crowd of supporters and if they are funded in a position to latch onto other people’s ideas, they would have copied anyway, so better to go to market with a fan base.

Aside from those startups that have intellectual property which may be patentable, (not that suitable for crowdfunding), in my opinion crowdfunding offers most tech plays an advantage on balance. Because crowdfunding’s popularity suggests there is abundance of ideas (ideas are possibly a commodity) and it is execution, marketshare, customer base and momentum that matter most to tech plays. These factors make tech plays that have originated from crowdfunding generally safer / better investments.

Ian: Agreed – many innovations are almost born as commodities – crowdfunding really only exists because so much product development can be outsourced these days, mostly all of it in fact. For example I have just bought a new bicycle seat of Infinity Bike seat off Kickstarter. I would say that if it has any merit that the incumbents will be copying this design very shortly. The bloke who formed the company has totally outsourced production, but he has a very small window of opportunity to develop a sustainable company. Its really a project and it might, just might become a company,

Debt vs Equity

Ian: I think that crowd-funding for future product development or delivery represents a ‘debt’ owed by the company. This represents a drag on future cash flows and also a restriction of strategic flexibility. There is a good reason why startups traditionally get funded through equity investment prior to product sales, and this is so they can spend all the money they have on accelerating their path to sales and achieving Cashflow positive status. In addition, once having taken cash for products the company is less free to change directions if it finds new competition, technology challenges or better opportunities.

Mike: Agreed, but if you have priced the product properly and the crowdfunds are released to you to complete and produce the product, there is no drag, quite the opposite. If you are launching a crowdfunding campaign without a prototyped product that is nearly ready to make then you have a major problem that could easily come off the rails. I understand Kickstarter has introduced a policy of requiring hardware prototypes to have been built prior to launching a new campaign which makes a lot of sense, Ian as you know better than anyone hardware is hard. A successful Kickstarter gives you your first 1000 or so customers who will most likely be more forgiving than someone buying in a shop.

Wardy: Using pledge-based or rewards-based crowdfunding pre-sold product business do create a ‘debt’, but where legislation is allowing CSEF then it is not a debt – its equity. It has the same economic advantage of direct equity investments by Angels or VC’s, but comes with additional practical benefits like the crowd of advocates.

Mike: I disagree, its a short term liability not equity regardless of the legislation there is no equity being issued (in some cases there is no legal entity, its an individual or a business name), however for all intents crowdfunding provides a very similar risk profile to equity for the startup without having to give up potentially valuable equity and I am fairly certain that most crowdfunding pledgers don’t expect to see their money if the campaign falls over nor is it likely they would ever take winding up action like a large debtor that has not been paid.

I am not aware of any major cases going through the courts in any jurisdiction as yet. Also there is no upside for the crowdfunder, in fact it is very biased to the entrepreneur but I think this is a good thing, if the product is popular, its a very cheap way to test the market to see if there is appetite without having to launch a business and build a product, factory etc. Content spruikers have been doing this for decades, describe a content product if enough people buy into it, produce the content. There have been many experiments with books as well, Stephen King was giving away the 1st chapter of new books and only completing the book if there was demand.

Wardy: As for crowdfunding making the business less nimble and able to respond to the evident changes required in their business plan – I can see how that could be true. My personal experience is that with polling and communication to the crowd you can assess the relative benefits of changes to strategy, which makes sense when its rapidly changing landscape such as tech. If the crowd thinks your change sucks it probably does or conversely if they think it’s a winner they will back that too.

Perhaps this is just my experience, but I have found Angel investors nail down the entrepreneur to a defined business plan that everyone buys into. The Angels I’ve had (I’ve never attracted VC money) are very reluctant to move (quickly) from the agreed business plan because it changes the management KPI’s and investment boundaries they committed to in the cool rational light of pre-money. I guess that is Investor specific.

Ian: I would agree that Angels are the lowest in my list of preferred investors. I invest in other people’s companies but only where I can take an active role in the operations of the business. I don’t see this as Angel investing.

Advantages of Crowdfunding

Marketing

Ian: One of the key benefits of product crowd-funding is its use as a form of marketing to geeks and early adopters when the product development is just about completed. Its a nice way to get your product noticed by a certain sort of person. But promoting a concept too early in it’s development phase is not always such a smart idea as I have mentioned above.

Mike: In the early days of Kickstarter it was about the funding to get something built, now most companies I talk to see it as much a marketing and product launch as raising the funding, in fact many of them often have Angel or VC funding, it has become an extremely effective way of getting a cool product market tested and in many cases where it is newsworthy major press coverage.

Crowdfunding Equity

Ian: I am unsure about micro-equity crowdfunding. Almost undoubtedly there will be a few winners under micro-equity crowdfunding schemes but many, many losers. I suspect that the return on investment (ROI) for investors will look like a very skewed Gaussian distribution with a small number of high returns, a handful of medium returns or ‘money back’ for investors, and a long tail of investors that lose all their micro-investments. (sounds like VC except there will be returns J ).

My guess is that this form of asset class will be loss making overall (negative ROI) simply because it is venture capital without the benefits of venture capital selection and mentoring (almost like Australian VC in fact, which has a long term negative ROI). This would mean that any committed investor would, the longer they invest, revert to the mean, i.e. have a loss making position. After a period of time any asset class which are loss-making (adjusted for risk) disappear.

Wardy: Did you say the Australian VC industry (my market) has a long term negative ROI? If that is true then crowdfunding should surely be used as tool to move this into positive for the VC’s by vetting and de-risking crappy deals so that the only ones they are exposed to is the medium and hot stocks. There is no reason a VC would come in a later stage and invest in an under-performing crowdfunded entity. Is it also true that the Silicon Valley VC industry has negative ROI, like the Australian one? Asked in genuine ignorance.

Ian: Australian VC historically has had a negative ROI. Tier 1 Silicon Valley VC is actually above the 20% ROI hurdle, i.e. profitable on economic basis. I have just written an article on the problem in Australian VC, but a quick summary is that the problems are people, fund scale, fund model and deal flow. My feeling is that equity crowd-funding would not solve these issues. But that is a guess only.

Mike: I also think that we have had such a small number of VCs In Australia with such small total funds and numbers of investments that it is statistically non valid, the sample size is too small.

Ian: I don’t know – the data I am looking at has 37 funds between 1985 and 2007, with a mean negative ROI for the lot of them.

David: Yet, we are seeing a lot of crowd funders and online VC structures replicating the single purpose vehicle structure that VCs have used for decades. OurCrowd, Seedinvest, Seeders.co.uk, and Funders club are the new players and more are coming. Some leading firms realize that there needs to be a lead investor.

Wardy: It’s my view that crowd-funding has a sweet spot between $50k-$100k and approaches limits (regulatory, practical and otherwise over $500k). This puts them in a different stage of funding to Angels and VC’s who enter on deals above that value. Equity crowdfunding is thus a feeder to established investment networks/channels. It sits further up the pipeline.

Mike: I don’t believe we should have purely crowd funded deals. I think we need a hybrid between a professional investor as the lead investor and crowdfunding to make up the volume of the round.

Venture Capital has been pretty broken in Australia for much of the 15 years I have been in around the startup scene. I believe that we will see Super Angels, who otherwise could have been Venture Fund managers, decide to start leading rounds with Crowdfunding taking the rest of the round.

In my opinion the following is an ideal scenario

  • Lead Investor leads $500k round, could be an individual or advisory firm but must put their money where their mouth is.

  • Lead Investor does the due diligence.

  • Crowd Funders follow with $500k-1m.

  • Lead Investor picks up a small capital raising fee for the funds raised

  • Lead Investor is the Director on the board representing the Crowd

  • Lead Investor picks up a similar MER to a VC for managing the Crowds money (this is reasonable in my opinion and is most likely thing to stop crowds being ripped off)

  • Lead Investor gets an extra % of carry for leading the round and sitting on the board.

  • If the lead investor is successful they will have more people willing to back them

This could in fact be a great way for smaller VCs to leverage their funds by allowing Crowdfunders to back them and to still earn income on the management fees.

Increasingly good entrepreneurs who have had successful exits will reject traditional 10 year VC Fund cycles and the pain of raising a fund (especially in Australia where many have failed to raise funding even when backed with Government IIF funds). The flexibility of a crowd model means not having to raise another fund, simply find a great deal, do the due diligence put it up on a crowdfunding platform, do a deal, if you have been successful then the crowd will back your judgment and put their money behind yours. You earn a higher management fee and carry for the work, potentially it could be similar to the management and carry structure of a traditional fund.

David: I have been advising angel networks for over 2 years to embrace crowd funding and become the lead investor of crowd funded campaigns. The UK has accomplished this with Syndicate Room that has now been operating for over a year. Business angels take a lead investment of at least 25 percent of the raise and crowd funders and other angels can co-invest under the same terms. They just closed a £590,000 investment.

Ian: It’s clearly early days and what you are describing is the start of an experiment. Micro-equity crowdfunding looks to me like venture capital with a few positive attributes removed For some its simply a source of cheaper and dumber money. If someone can come up with a mechanism to overcome some of the potential issues, as Mike has suggested (e.g. placing a ‘rating’ on entrepreneurs so the punters are making more informed bets) then maybe things might work out. Having said all that if the whole thing is promoted as a ‘gamble’ managed through the betting shops alongside the horses then maybe it will take off anyway. Compared to investors, gamblers subconsciously do expect to revert to the mean of a negative ROI.

Wardy: Through the lens of a VC there would be two types of deals, good ones and gambles. But through the eye’s of a CSEF-nut like me there are 2 types of experiences: the ones I have when i interact with other people’s businesses and the experience I have when it’s “my business” (no matter how small your equity stake or voting rights, the experience of “mine” is huge). Having more people buy in to an idea has a value in “network effect” that mysterious “network effect” must have value otherwise the prices paid for successful tech plays Tumblr, Twitter, Snapchat etc are a ruse.

Ian: I get that – if the primary intention is have fun and be recognised as part of the ‘club’ then I think this model will be a roaring success. I also recall it took a few cycles, 3 or 4, for the current VC model to settle down into something worked. All the negative scenarios had to be understood and then factored out – this is what you see in standard deal docs. It might take a few cycles for crowdfunding to get sorted too.

Crowdfunding vs VC

Ian: Good VC in Silicon Valley has very special due diligence and supervisory skills. One, a very defined means to select investment based on years of partner specialization in a market segment where they know all the corporations that are buying companies, where they have worked themselves in both corporate and start-up CEO roles. Two, ability to mentor company including finding valued co-investors, new CEO’s and other management, board overview and strategic input, and exit guidance, introductions, and execution. Three, VC’s solve problems with excess capital (in the US).

Mike: Yes this value add is what is expected of the VC, I am not certain this happens in real life.

Ian: I expect to see a lot of micro-equity crowdfunding pop-up, especially where there are tax incentives for investor/gamblers (as in the UK). Remember it takes ten years or so to assess the value of a new financial asset class, and even longer if there is a macro-economic event (like a GFC) to confuse the results. I honestly hope that a sensible model does emerge for micro-equity crowdfunding, but you have to remember that there is already too much VC money in the market. Adding micro-equity crowdfunding to the mix will simply depress financial returns for all investors because what doesn’t change is the M&A/listing value of the sum of all the exits – you simply can’t make quality exits by pumping money into the front end creation of start-ups (because quality deals rely on a fixed quantity of quality entrepreneurs). Just for clarification here – across the whole market for start-ups the amount of money going into the sector simply has to be less than the total value of all start-up exits, or else the asset class is loss-making.

Wardy: Is the whole asset class of tech start-ups (incubated, funded and matured the way they are) loss making?

Ian: For the last decade, yes, VC globally has been loss making simply because too much capital was committed to VC early in noughties when LP’s got a little over excited. We are still working through this overhang of excess VC capital and excess availability of new technologies.

Wardy: Also, I’d make the point that the destiny for many crowdfunded business (unlike tech startups) is not to be listed or trade-sold in 3-5 years. Many crowdfunded ventures will be products of a tangible nature, niche servicing businesses and local businesses that are sourcing equity and customers concurrently.

Ian: None of the key VC characteristics will available for micro-equity crowdfunded deals so one would expect a much lower quality of return on investment. In fact it could be worse than expected since the deals that go to micro-equity crowdfunding might in fact be the deals that are sensibly rejected by VC. Another by-product of not having VC mentoring is that entrepreneurs will not learn much by failure, and hence the current rule that ‘5 failures of a founder will lead to the sixth success’ will be broken.

Wardy: Might be just me, but if the Australian VC industry has negative ROI, the average Silicon Valley VC has negative ROI and the whole asset class of tech start ups is loss-making, then the business model for finding and funding of these businesses isn’t economic and the VC’s are either not adding the value they believe they are or tech startups is not a good investment with or without crowdfunding playing a role.

Surely Ian can’t be saying VC’s do a good job of vetting, funding and accelerating ventures if my understanding of what he has said (negative ROI for the asset class) is correct?

Ian: Tier 1 VC is good. The overall problems in the sector is that Tier 3 in the US and VC in Australia isn’t anywhere near as good. So one can’t paint the whole asset class with the same brush.

Mike: I agree deal quality and due diligence is a big issue in a crowdfunded deal (as it is in any deal) which is why I think we need a Lead Investor with crowdfunding backing him up.

Ian: Yeah the problem here is that I, for one, as a lead investor don’t want to deal with a bunch of micro-equity crowdfunding punters as co-investors and shareholders. I would prefer to deal with one or a small handful of professional investors that I know and trust.

Mike: What if there was a reward for this which provided a similar financial result for you as running a VC fund (ie carry and management fee) without the pain of trying to raise a fund. It would certainly be more flexible and nimble. At some point this would make financial sense and for you it would lead to leverage you can’t get on your own.

Angellist is running a similar concept called Syndicates

Angellist Syndicates

Angellist Syndicates

Ian: I would have to trial it first before I answer that, or better still watch someone else trial it!

Ian: There may be a disconnect between entrepreneurs and their source of capital. It is human nature to take more care of capital if one knows the individuals representing that capital personally and they are sitting on your board. I expect micro-equity crowdfunded companies to be looser with their fiscal or operational responsibilities.

Wardy: The counter argument is that the crowd minimises the risk of a person being fiscally irresponsible because it is shared with many people if they are. I’ve known many mates who don’t talk about being ripped off in deals where only a small number of people are players because they feel personally embarrassed at having been swindled. A crowd thats embarrassed feels rage not shame. Pity the repeat crowdfunders that are fiscally irresponsible.

Mike: These are reasonable concerns, again having a known lead investor with their own money invested should resolve some of these issues. Also if there is a platform to facilitate the management and corporate Governance of investees companies will be forced by the platform to adhere to the funding rules.

I see a crowdfunding platform which does the following

  • Allows a business to create a fund raising IM (in a standardized template so that they can all be benchmarked)

  • Allows Lead Investors to sponsor a deal (somewhat like a Broker/Underwriter) does for an ASX listing, these would be their mentors and then board directors as well as representing the crowd in critical business matters.

  • Allows comments, questions, ratings by crowdfunders on each deal with funding commitments locked in once committed

  • Perhaps a Lead Investor could have two director seats, one for himself and one for the Crowd

  • The crowd could vote to remove a Lead Investor if they lost confidence (as normal shareholders do now)

  • The platform could have a messaging facility for each company being required to file updates and financials monthly to the investors via the program

  • The platform and the Lead Investor could develop KPIs an investee company and those are reported on in the monthly update

  • All critical business matters which can be delegated to the Lead Investor will be

  • For Critical Business matters that cannot be delegated, the platform can manage the process of calling a meeting.

  • Potentially this could also handle digital proxy voting and digital voting

Wardy: In relation to the CSEF legislation that Australia is considering chief concern is the way intermediaries can provide processes for Issuers that support governance concerns of Investors. This has yet to be tested in Australia, but I would be interested in the UK experience of governance, disclosure, transparency and Investor confidence in deals. David?

Ian: With many small investors micro-equity crowdfunded companies will have a large administrative burden associated with keeping their investors informed and any process that requires shareholder approval (and there are many of these) will be a logistics nightmare and very expensive. And worse still it will be slow.

Wardy: In most cases the funds and rights of the crowd are pooled to special purpose vehicles that then deal with the crowd-derived investors as a single group.

Mike: I take your point however these can be circumvented by passing a critical business matters provision which the lead investor can exercise for matters such as capital raising, sale of business etc. Again if a crowdfunding platform incorporated a lot of this it would go a long way to solving these issues.

Ian: There are restrictions under corporate law which make many critical business matters subject to shareholder approvals. You can’t get around this at all. And if you try, and the company ever ends up being worth something, you will find yourself in court for ever. Spurious or otherwise, this will happen.

Mike: How about if the platform provided a digitally signed proxy vote?

Ian: One interesting class of finance is Venture Debt. It represents about 10% of start-up funding in the US. This is repayable loan finance to start-ups with high interest. 10% is about the right level since it represents the ceiling of equity to debt levels that mean debt can be repaid with appropriate risk factors and interest rates. Today all venture debt is by managed funds – I think that in the US that micro-equity crowdfunding could be an alternative and cheaper means to raise Venture Debt. I am sure this benefit wouldn’t passed onto start-ups, but in a competitive market you never know. Cheaper venture debt would be a good thing.

Final Words

Andrew Ward: I’ve found the above fascinating. I’ve drunk the “kool aid” (I’m a convert to CSEF) as it were and think that CSEF is a great economic activity because it creates real businesses (often with markets ready to sell and refer), it un-taps investment classes and far from being a gamble reduces risks of investment.

This discussion is focused on tech rather than product businesses and definitely more than local infrastructure projects where I believe the sweet spot for CSEF is.

There appears to be no science to picking winners and exits are few and disproportionate when they come. Voyeuristically watching tech plays and the funding avenues at a entrepreneurs disposal is akin to Survivor. When those entrepreneurs have a high profile its like watching Celebrity Survivor.

If I understood all of the above comments from Ian correctly, this game of Survivor is being played for negative ROI!

If CSEF isn’t embraced by the tech community as a source of good deals and later recognised as a great start to businesses going from “idea to operational”, then I’d be surprised.

However, CSEF is not just a tech play, its about small business, niche business, local business and the experience of “my business”. Crowdfunding businesses not tech start ups is the future for crowdfunding.

The internet, social media and collaboration pieces merely enabled the human or social desire of people to do with their money something of meaning that has instant and delayed gratification in it for them. Hence why crowdfunding will sustain and why so many platforms are springing up.

Investing in crowdfunding platforms is a gamble for instance because of the thousands that have popped up there will be only a few in a couple of years time. If I were a VC looking at platforms to invest in, then I’d be nervous if their core marketing plan didn’t have clearly stated focus to help create real revenue generating business from day 1, like those that sell tangible products or those in the community space (local economics) where the same business model would be rolled out across many geographies. In essence where people would locally crowdfund and locally consume the services provided by that crowdfunded business.

Taking that dimension of tech plays – high rate of failure and applying it to the high rate of platforms that will fail in the next 24 months is not a fair comparison to how crowdfunding will perform as an investment class over the next 10 years. Being a bit uppity, I’d say CSEF has as much reason to be buoyant about its future in the real world investment space than has the tech space. The tech space though I think needs to have a good hard look at itself. So much talent, energy and creativity going to waste. Such a weird sales funnel, subject to Zapfs law, Moores law and eroding financial models. Tech investments are a gamble for VC’s.

So back to how can crowdfunding help tech investors?

Well, in my world I see crowdfunding being pre-seed and seed investment (usually $50k-$100k). The very top of the sales funnel. Crowdfunding sorts the wheat from the chaff.

Usually that money is pre Angel rounds and definitely pre VC. Its where Friends Fools and Family operate if the entrepreneur is lucky.

By definition if a deal has been successful at gathering a crowd of investors it now has advocates for customers and that de-risks these now seed-funded ventures when compared with seed-funded ideas that may be pre-revenue and yet to have a database of customers or advocates.

The crowd weeds out ideas that just aren’t that good and delivers a better quality idea.

But the process also weeds out bad entrepreneurs, they have to make a compelling pitch for a start that convinces people they can execute this good idea (at least to the next stage). They are (country specific) vetted and unable to commit fraud or disclosure breeches – which reduces DD costs for Angel or VC funders. And you have real time evidence of their ability to continue to manage their crowd of investors and show you how they will manage your money and expectations. Finally there is social pressure to perform above and beyond with increased shareholders. Far from being nameless and faceless these shareholders are a community able and willing to talk and so the entrepreneur is going to be “on game”

The risk of enterprise is smaller with crowdfunding being there at the birth of an idea as it becomes real. The risk of entrepreneur is also diminished.

There was mention of the concern about shareholder numbers. But my understanding is that most tech ventures that are crowdfunded don’t take the crowd directly onto their shareholder register and these class of shareholders (the crowd) are pooled for the purpose of keeping the share register friendly for Angel and VC investment down the track.

If that pooled group of shareholders are represented at board level or not would be a decision on a deal by deal basis. But the risk of that representative being a moron is not higher than the risk of an entrepreneur thats had to put his uncle on the books when his uncle gave him his first $50k-$100k seed funding.

Angels and VC’s can then further improve their odds of backing winners by having lead Angels and syndication alongside the crowd. That seems to give investors in the tech space greater confidence.

Ian: What I have learnt from this discussion is that crowdfunding in one scenario might be a funnel for VC, but that it might be more useful for the funding of small niche companies that might never need or want VC funding. These companies are pretty much about great design and they use off the shelf technology & service providers to both design and build their products. If the models for crowd-funding are focused on these latter types of companies then the whole thing makes a lot more sense. The role of crowd-funding is then to help turn projects into SME’s, by the use of financial commitment (to the company or their products) of the pre-converted. Surely the internet, if it has done anything for us, has enabled small companies that are totally ‘outsourced’ to efficiently compete with the large global incumbents and, if so, maybe crowdfunding is their natural source of seed capital.

Mike: The one comment (and this is for you Malcolm Turnbull) I think Australia is too much of a nanny state to provide a functioning Crowdfunding regime. (except if you are in WA, then its ok to sink tens of millions of dollars into Mining Exploration Non Limited’s that sink and get re-listed as Tech companies)

Over the last 10 years Australian politics has become increasingly focused on taking responsibility for every dimension of society and incessant rule-making.

I think we will have trouble with this as a country, I believe we will struggle to pass legislation which provides a real crowdfunding framework and I think the Government will try to enforce some form of adherence to the Financial Services Licensing regime and I think the end result will be a watered down sophisticated investor regime where only accredited advisors can help companies get crowdfunded by a small pool of investors.

In my opinion Equity Crowdfunding will probably have to happen in some other country like Singapore that is trying to encourage startups and other means to promote growth companies.

It is my prediction that Singapore is going to become the Silicon Valley of Asia, the programs being offered by Singapore’s Economic Development Bureau are miles ahead of Australia in creating a climate that encourages startups and large tech companies to move to Singapore, they also offer a very easy visa program for your family, submit a valid business plan and they will allow you to enter and leave the country as needed for as long as the business is valid. Frankly they also have a very attractive tax regime and apparently are offering very attractive financial incentives to relocate or startup a business there.

If Australia wants to be competitive on a global basis, they should look to beat Singapore.

As always we encourage your comments. Tell us what you think of Equity and Project Crowdfunding in the comments section below

 

ents.

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iPledg

Surprising numbers – Australian Startups, Fundraising & Crowdfunding – iPledg.com

Crowdfunding, , , , , ,
iPledg

iPledg

Andy Tompkins and Bryan Vadas are the founders of the iPledg.com Crowdfunding platform.

iPledg is serious about helping the Tech and Startup sectors get the seed funding they need. As a special offer to Startup88.com readers iPledg are wiping their fees for projects listed before December 31st 2013. Simply go to www.ipledg.com , sign up, login, create and submit your campaign then email us at [email protected] to ensure we wipe our fees for your campaign. Good Luck!!

Andy Tompkins - Founder iPledg.com

Andy Tompkins – Founder iPledg.com

The numbers are out, surprisingly only 24% of start-ups seek external funding from any source*. Of these, 57% are successful in securing the funds they request.

This means just over 13% of start-ups are successful in receiving external funding of any kind. Why is it so? And how do we overcome this hurdle to allow more start-ups to get the funding they need to launch, employ, innovate and develop? The answer may well lie in equity crowd funding.

The current Australian economic landscape is a patchwork made up almost completely of small business and start-ups. Despite a huge geographic footprint, Australia is home to just 24 million people. Between them, they are involved in the 2 million businesses currently operating. Of these, 96% are small business, those defined as having 0 – 19 employees. Small business in Australia accounts for just over half of all private sector employment, so their importance as an employer cannot be understated. Add to this the fact that at any time, over half a million people are involved in some form of early stage entrepreneurial activity, and you see that small business and start-ups are the foundation on which the entire economy is build.

Bryan Vadas

Bryan Vadas – Founder iPledg.com

The current misunderstanding is that start-ups are funded through the 3 Fs – Family, Friends, and Fans of the initiator. The truth is actually quite different, with entrepreneurs looking inward and providing the funding themselves, either from personal savings or personal credit card. Completing the list of the top four sources of funding currently used by start-ups, we find personally-secured bank loans, or cross subsidy from another business owned by the founder. In fact, of the top 20 sources of funding for start-ups, money from friends and other external investors rates only as number 11.

The ironic part of the whole situation is that the Reserve Bank of Australia claims that 80% of loan applications made by small business are accepted. In contrast, their figures point out that only a small fraction of small businesses are successful in securing venture capital funding.

The impact of the overall lack of success in small business and start-ups receiving the funding they need cannot be understated. The primary impact is on innovation, with 33% of early stage and start-up businesses claiming that the biggest obstacle to innovation is a lack of access to the funding they need to make it happen. Currently in Australia, the other options for equity fund raising are offers to the public (heavily governed and high cost to prepare and lodge a prospectus), angel investors (with whom start-ups have an average success rate of 1.4% in securing their required funding), and venture capital (which has funded an average of 25 companies per year over the past 10 years).

So the reason why start-ups don’t seek external funding is relatively clear – they believe there is a lack of options open to them. They recognise the slim chance of securing funding from VCs and angels, and the costs and high levels of governance around offers to the public makes them feel “why bother?”. In fact, 76% of start-ups that don’t even concern themselves with seeking external funding. The other major contributor to their lack of willingness to secure outside investment is a lack of education about what external funding will do for them, as many believe external funding means giving up control, something that is not palatable given their emotional investment in their innovation.

Enter Equity Crowd Funding. In Australia, the rules of the game have only just started to be drafted. Regardless of how the mechanics will finally be delivered to the market, equity crowd funding will simplify the access to capital for entrepreneurs and small business. Seeking funds will no longer involve having to bow down to grey-faced men and jumping the hurdles they set. Those seeking funding will soon have world wide access to investors through online campaigns. “Asking” will become much less daunting, as the innovator can approach their “first tier” (family, friends, and fans) to check out the campaign online, rather than going cap in hand and asking for a handout, thus making the whole process for less confronting. Engaging with the “second tier” or “friends of friends” also will become much simpler as the first tier is able to easily pass the campaign on to their networks by forwarding and endorsing a link. Once momentum is achieved, the word can more easily spread to a broader audience through online campaigning. The vast “third tier” or “smart money” can then jump on board and deliver the bulk of the funding, and it is access to this tier that innovators would traditionally never have access to without equity crowd funding.

With the pending introduction of Equity Crowd Funding, seeking funds will become much simpler. First followers will then be able to spread the word to their networks of what they have done by way of their investment, and then campaigns will have a greater chance to go viral and have global reach through the use of social media and the internet. Whilst equity crowd funding is largely unavailable (or, at least, highly regulated) in Australia, the initial noises are being made to hopefully make broad based equity crowd funding permissible in the not too distant future, making it far easier for start-ups to ask for (and to secure) the funding that they so desperately need.

* http://www.innovation.gov.au/SmallBusiness/KeyFacts/Documents/AustralianSmallBusinessKeyStatisticsAndAnalysis.pdf

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Robot Dragonfly - Credit Kickstarter.com

Crowdfunding & Innovation – Paul Niederer – ASSOB

Crowdfunding, , ,
Paul Niederer CEO ASSOB - Credit dagvandeinformal.nl

Paul Niederer CEO ASSOB – Credit dagvandeinformal.nl

Paul Niederer is the CEO of the Australian Small Scale Offerings Board (ASSOB), Australia’s largest and most successful business introduction and matching platform and one of the more structured methods of raising early stage investment funds with a focus on compliance, disclosure and corporate governance. To date ASSOB has raised over $135 million for Australian startups. You can read more of Paul’s thoughts on crowdfunding and early stage investing at his blog Paul Niederer.

Introduction

Many a good innovation dies on the vine due to the lack of funds to make a prototype or take it to market.

Crowdfunding is bridging this gap.

The main idea with reward and equity crowdfunding is that the innovators and their helpers set up a fund raise as a new project on a crowdfunding platform. The innovators, now promoters, invite others to assist them with funding their goal within a specified timeframe. Most projects have a funding goal that if reached makes their project worthwhile. Depending on whether the crowdfunding is donation, reward or equity based backers receive a gift, product, a good feeling or shares.

In a recent Indiegogo (a popular crowdfunding site) presentation I attended it became obvious to attendees that reward crowdfunding is not just about the money. Innovation is at the core of virtually all raisings. The presentation highlighted five reasons innovators may use a rewards crowdfunding platform to raise capital.

Validate the market.

The innovator wanted to open a “Cat Cafe” in London, needed £108,000 to do it, but was unsure if there was enough interest. The campaign raised £109,510 in two months which validated the idea of opening a cat cafe where visitors will have the opportunity to kick back and relax with a cup of tea and spend time in the soothing company of our purring feline friends. (Ed the facebook page for Lady Dinah’s Cat Cafe now has 13000 likes)

Test a market.

Canary Smart Home Security Device
Canary Smart Home Security Device

 

Canary pitched itself as the first smart home security device for everyone. Canary is a single device that contains an HD video camera and multiple sensors that track everything from motion, temperature and air quality to vibration, sound, and activity to help keep you, your family and your home safe. Unsure of the market the promoters pre-sold their units in a crowdfunding campaign with an initial sales goal of $100,000. The market responded with orders for over $1.9 million. Over 7000 units were sold. A very successful market test.

Get extra promotion.

Robot Dragonfly - Credit Kickstarter.com

Robot Dragonfly – Credit Kickstarter.com

Sometimes your sales may be confined to the market as you know it and need a wider audience. Take the Robot Dragonfly for example. The Dragonfly was developed at the Georgia Institute of Technology, as a joint effort between 20+ researchers, PhDs, professors and students from multiple universities across the world. Through their crowdfunding project they raised over $1.1 million and gained 3200 customers.

To capture data.

Scanadu Scout Personal Health Sensor - Credit Scanada.com

Scanadu Scout Personal Health Sensor – Credit Scanada.com

The Scanadu Scout is a personal scanner packed with sensors designed to read your vital signs and send them wirelessly to your smartphone in a few seconds, any time, anywhere. The device promoters used crowdfunding to target the consumer market but the backers they attracted, and the data generated by these backers, is certain to capture the attention and significant budgets of the medical industry around the world.

 

Money and matching money.

Sometimes it is about the money. This was the case when Tesla’s final laboratory came up for sale. A non-profit wanted to buy the property and turn it into a Nikola Tesla Museum. The property was listed at $1.6 million, and this non-profit would receive a matching grant from New York State of up to $850k if it raised the money. 33,253 contributed over $1.3 million and the building was saved.

Equity crowdfunding and innovations also go well together. On the ASSOB platform hundreds of products and services have reached the world due to raises on ASSOB’s proven capital raising platform. The examples that follow raised a total of $16.8 million include plastic wine barrels, pressurised fruit juice, dental plans, a self managed superannuation portal, open source network management software, proximity advertising, childrens’ designer furniture, encryption software, mining tenements, welding technology and an on-line photography marketing site.

There are now thousands of examples world-wide where innovation and crowdfunding go hand in hand.

And … this is just the beginning.

 

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