Month: December 2008
Today’s great post (really an article) is titled Getting attention (and cash) from VCs and angel investors. If you are in college or a recent graduate, you are starting a company, and are looking to raise money, this is a helpful article.
Today’s best post is from Fred Wilson and is titled Investing In Thick and Thin. Once again, Fred totally nails it.
"Our approach is to manage a modest amount of capital (in our case less than $300 million across two active funds) and deploy it at roughly $40 million per year, year in and year out no matter what part of the cycle we are in
That way we’ll be putting out money at the top of the market but also at the bottom of the market and also on the way up and the way down. The valuations we pay will average themselves out and this averaging allows us to invest in the underlying value creation process and not in the market per se"
This is similar to our philosophy at Foundry Group, which is probably not a huge surprise to anyone that knows us. Fred finishes with:
"As I’ve written here recently, I see no signs that the venture market is drying up. Its changing, for sure, and if you aren’t running a company that’s emerging as a clear winner, its going to be tough to raise money in 2009 from anyone other than your existing investors. And look for them to be more cautious, more diligent, and less generous than they may have been in the past few years.
There’s money out there in venture land and its going to get invested in 2009 and its going to get invested wisely for the most part. At least that’s our plan and I’m confident we can execute on it."
Absolutely worth a read from beginning to end.
Q: I love your article in the Entrepreneur magazine. It was very information. Thank you. I am now currently developing the domain name I had for 9 years to due other business and real estate investments. Do you have any suggestions which VC wants to invest? Currently looking for $100k to $250K. I only want to serious investors only. Also, I want a VC with connections and experience in helping develop a company, not just throw money into this venture. This is my second business and so I am familiar with growing a business.
A: (Brad) I took a look at your website and have no idea what your business does. My strong recommendation is that lead any email you send to a prospective investor with a short (a paragraph or less) description of what your business will do. Just saying that you are developing a domain name doesn’t really mean anything.
In addition, if you are only raising $100k to $250k, it’s unlikely that VCs are the right target for you. I’d encourage you to focus on your network of friends and family along with potential angel investors who are either geographically close to you or are interested in what you are up to.
But – most importantly – make sure you are stating clearly what your business is going to do in whatever approach you make to any investors.
Q: I have an angel investor that is asking me for full anti-dilution protection for the lifetime of their investment, along with a host of other economic terms including dividends. They are putting in a small amount of money, but are insisting that "this is the way it is done." This doesn’t seem right – am I missing something?
A: (Brad) One of the challenges with angel (and VC) investors is that when the macro-economy is tougher and money is harder to find, terms get tougher. In many cases, especially with later stage companies, this is completely appropriate. However, it’s usually a mistake on the part of the investors with early stage companies.
In our experience, the simpler and more straightforward the terms in the angel round, the better for all parties. The entrepreneurs raise much needed capital at a fair price on terms that are easy to execute on. Equally importantly, these terms shouldn’t impede any future financings.
As an early stage VC, I’m very comfortable investing in a company that has previously raised angel money. However, I will always insist on cleaning up any angel deal that was done poorly. "Full anti-dilution protection forever" is an example of a term that should never exist. Just because an angel investor bought 1% for an investment of $25k (implying a $2.5m post-money valuation), that doesn’t mean that angel investor should have 1% of the company after another $10m has gone into the company. While theoretically this is possible to negotiate away in the next round, I’ve encountered angel investors who held up the entrepreneurs and almost killed companies over irrational terms like this, mostly just to demonstrate "how well they could negotiate." Whatever.
Another silly example is the whole notion of dividends in an early stage investment. Dividends occasionally get paid out in VC-backed companies, but only when the companies become solidly cash flow positive and have a huge surplus of cash. This is such an atypical event that they early angel investors shouldn’t be worried about it. In addition, it’s another term that will likely get cleaned up in the next round, as the VCs will likely put generic dividend language into the deal (e.g. "non-cumulative dividends of 8% will be paid out only when declared by the board", which almost never happens.)
My strong suggestion to all angel investors – regardless of the macro-economic environment – is to "keep it simple and fair." My recommendation to all entrepreneurs negotiating an angel round is to make sure you have an experienced angel investor leading the charge and helping you set terms.
David Cohen has today’s great post up titled The Boomerang Founder. He defines "the Boomerang Founder is the one that “throw away” but then comes back later on and hits you upside the head, often causing significant trauma."
"You start a company, and you and a couple of buddies get together and draft a simple email about who’ll own what. You name the company, and maybe you even incorporate it. You’re in business! Some time goes by, and one of the founders isn’t work out or takes a day job or loses interest. Maybe she’s just not a startup person, she realizes. Now you’ve got one less founder, and you’re down to two at this point. It feels like no big deal. A buddy is departing – it’s all good. They’re good people."
Read the story. I’ve seen it more times that I care to recall. David has some very practical advice for all founders at the end.
Georges van Hoegaerden, the managing director of The Venture Company, has today’s post of the day titled Which investors to avoid. In addition to a couple of great one-liners, it’s got some good advice.
To reinforce Georges post with an opposite, take a look at Fred Wilson’s post Soundcloud – Flickr For Musicians. In it, Fred offers a suggestion for the best way for an entrepreneur to pitch him, "they should send me a link to their web service and if I like it, I’ll follow up and meet with them" reinforcing his position as one of the most accessible VCs ever. One who gets innovation, loves working with entrepreneurs, and understands the value of clear, crisp, and detailed interaction in the process.
I’ve gotten several emails recently from folks complaining that their VCs are wasting their legal spend on changing indemnification agreements. What is going on and why is this important?
Let’s say you’re a VC and you sit on the board of a portfolio company. Something goes wrong at the company; and the plaintiffs sue everyone in sight, including you. You don’t welcome the idea of paying litigation costs out of pocket, but luckily you have an indemnity agreement from the portfolio company – saying that the company will cover litigation costs and liabilities. You also are indemnified by your VC fund, but until recently most people thought that was just a “backup” – in case the portfolio company was insolvent.
But that was before the recent Levy v. HLI Operating Company case. There, a Delaware court surprised most experts by holding that where the individual board member had indemnity rights both from the portfolio company and his fund, the fund and the portfolio company had to share claims for any indemnity claims required to be paid. [This clearly will lead to a financial and process nightmare dealing with different insurance carries and attorneys. – Ed.]
The result? VCs are changing their indemnity agreement forms. The NVCA form of indemnity agreement has been changed to make it clear that the portfolio company indemnification is the board member’s primary source of protection, and the VC fund will have to pay only if the portfolio company is unable to do so. Since most people assumed that was true prior to the Levy case, our experience is that most companies aren’t fighting this change.
Tim Draper – the co-founder of DFJ – is the latest entrant into the pantheon of VC bloggers. So far he hasn’t said much, but he did take his clothes off while singing the chorus of his song "The Riskmaster."