Bootstrapper.com - Confessions of Serial Entrepreneurs

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Richie

So now that the election is over, we can move on to new things. I wanted to share for a minute about something i’m involved with - The Connectors Group . The Connectors Group is a new angel investor group being formed out of the collective network of myself and of a few friends (including our MD who was luckiest enough to have been an angel investor in a little company called GOOGLE.) The Connectors Group also will work with companies that need to tap into the collective network of Connectors for help and business development/advisory. The premise is to help great entrepreneurs succeed even if its something fundable or if it doesn’t need funding. Jeevan, our MD calls it “mentor capital” but overall the goal is to build some more infrastructure behind the community here between the Angel Group and Connectors Advisory and some educational events that are being planned so that over the next few years there are more places to turn to in order to help build companies. Like everything I do, expect to see a lot of alliances being formed around the group so it becomes a giant funnel for NYC - hopefully. It’ll help everyone if it succeeds.

I recently saw a video on YouTube featuring David Rose, the very successful serial entrepreneur and financier. A summarization of his presentation (with some of my own comments included) follows…

Outside of what is on your previously prepared slide deck, there are 10 crucial traits an entrepreneur must convey to a group of Angels if they expect to be funded. They are qualities which one cannot fake and are the foundation for true success as an entrepreneur.

The single most important asset an Angel invests in is the entrepreneur. It is not business models, markets, financials or anything of the sort. They are investing in you. That’s it. Thus, the entire purpose of a pitch is to convince investors that you are the entrepreneur for whom they are going to risk and invest their money in, and as a result, then make a lot of money in return.

As stated previously, an entrepreneur has very little time to grab their audience’s attention….. actually only seconds- just those initial 10 seconds.  Therefore, make sure your pitch starts off like a rocket and then immediately transitions into conveying the top 10 traits which investors look for during your pitch. These include:

1)     Integrity: This is the most important attribute in a prospective entrepreneur. An investor would much rather invest in, and take a chance with, someone where there is no question regarding alternative motives or who they’re looking out for in the long term.

2)     Passion: Entrepreneurs by definition are individuals who are leaving something and starting something else. Something completely new. Creating a new venture and putting their lifeblood into it. If you’re not passionate about your venture… then why should anyone else be?

3)     Experience: You have to be able to say “Hey, I’ve done this before.”… this means starting an enterprise and creating value and also taking it/seeing it through beginning to end. This is why Angels love to fund serial entrepreneurs- because even if they didn’t do it right the first time, they’ve learned the hard lessons that will stand the test of time (which they won’t repeat). Plain and simple- they want experience in creating an organization.

4)     Knowledge: If you’re telling an investor you’re going to be the great developer of a new trend- you better understand the macro and micro-level implications of your new product/service and encompass an immense amount of domain expertise the given vertical. You must know your market, who the players are and why your product/service brings new and significant value.

5)     Skills: These include technical knowledge, marketing, sales, management, etc. Not everyone has such a large and diverse set of competencies and experiences. In fact, very few have a solid acumen in all of these crucial skill areas to run a company. Therefore, as the entrepreneur, you must be a leader (See #6).

6)     Leadership: An entrepreneur must convince investors that they’ve recruited and developed a team that encompasses all the necessary skill sets to run an organization efficiently and effectively, or, convince the investors that they can do so personally. They must present themselves as having the necessary charisma, management style and ability to get others to follow their lead, as well as inspire and motivate them.

7)     Commitment: An investor wants to be assured that you’re going to be there to the end with your venture. Convey that you’ll fight to the death and do anything possible before losing even one dollar of your investors money. Fiscal responsibility is imperative as bad things are bound to happen.

8)     Vision: You have to be able to see where the venture is going. There is not one investor in the world who wants another “me too” product. Instead they seek entrepreneurs who know they can change the world.

9)     Realism: Investors want someone who is grounded and realizes that a good idea doesn’t always ascend to a market changing idea. As stated previously, bad things do occasionally take place, thus it’s imperative to be rational and have such projections in place.

10) Coachable: Investors need to know that you have the ability to listen and accept constructive criticism.

So a few weeks ago, Adeo Ressi, founding member of theFunded gave an awesome talk at the Web 2.0 Conference about how to raise smart money. Check it out here
Adeo’s Talk!

So us entrepreneurs tend to not properly value outside help. We don’t like sharing equity. We don’t realize that if we give someone 1% and that leads to us getting an investment at a 5% higher valuation or selling the company for 1.5% more we just turned a profit on giving away equity. It’s weird, other professions and late stage companies always value help. Did you know that typical investment banking and raising money for a late stage company charges 7% while for a startup a banker is lucky to get 5%. Yet it is MUCH harder to raise money for a startup and its less money so there is less money in it. It’s a weird industry. I love it because its fun to build “Yes Me Ayin” which is Hebrew for something from nothing (the quote is from a Jewish Philosophy book from high school called The Kuzari) but it’s really difficult to work with some other entrepreneurs either as partners or consulting because most of us simply don’t value help.

So you have a choice where to invest your money. You can buy shares in Citi or Goldman, which have a chance of going down to zero or could go up a few points or you can invest in a private company (startup) that can go down to zero but you have a shot at a 3X, 5X, 10X, 100X return. What makes more sense?

In our twisted economy, startups are safer. Almost All investments these day have the same BETA (risk factor). Almost all big companies rely on commercial paper and short term financing to survive. If they can’t borrow they die. That is actually riskier than a funded startup that at least has 12 months to live.

And returns have more potential with startups…a hot startup beats a 10% annualized return…

Think about it…

I keep getting asked why I don’t start a fund given my network … now I’m not planning on doing it but I figured I would do a little exercise to see what it would look like .. here’s a few possibilities …

1) Sidecar to invest in companies I found. An incubator type of fund to put in bridge $ into my own companies ($250k-1MM) this is often the hardest amount to raise and most valuable. I would like to have my own little fund available so i can invest once i get to launch phase in my own companies in preferred stock (so $1 = $1). Bootstrap/self fund to launch. Then this money would come leading to a Series A.

2) Outward VC = but it would only be in situations where I can take a founders level stake and in situations where I (we) can provide value beyond money. My greatest value to myself or anyone else should never be my money. If it is, I’m not interested. I would put in $ if we could add equivalent value as a founder and would look for a founders level stake (between 10-50%) depending on what the companies situation is. Investment size would be between $50-500k. It would be either seed, angel stage or bridge to Series A. The goal would be an investment to even it out as providing founders value. (though i would take it in preferred stock) and i would allow the entrepreneur to invest cash in preferred stock along with me. I also like the Founders Fund provisions allowing the entrepreneur to sell some of their stock in each subsequent round.

3) Developers Garage. This is Suli’s idea but i like it a lot. Start with 10 kick ass developers (pay them each a small salary -50-75k), each one brings an idea and gets a small outside budget to work with ($25,000ish). The idea is that every 2 weeks, another idea gets killed and that developer gets assigned to another startup. The goal is to start with 10 ideas and to end up launching 2 sites in 90 days. The structure would be such where everyone has a stake in the overall pool of startups with greater vesting depending on how long your idea lasts and if your company ends up being the one going to market and if it’s eventually exited. Also, the longer you last, the more $ you get to put into the business. This is an American Idol kind of model applied to kick ass developers. I think it could work. I actually made a tv pilot a few years ago that was something like this but that’s a story long buried in the past.

Overall, my value is at the idea/incubation/seed/angel/bridge stage. Once a company is functional and fully funded, they can buy (Hire) people with better networks and better strategy and ideas than mine but before the point of funding, the network and expertise is worth a fortune since the cash isn’t there to buy it. So the idea is to provide the structure to add value where value can be added.

Anyway, what does everyone think of my fund models?

R

Just a thought … there are a bunch of strategic investors in town that are often overlooked. They tend to be overlooked because they don’t actively seek deal flow. They usually wait for people they already know to come to them. I’m not going to talk or comment on whether most strategic investment end up creating strategic value but it is a very good source of capital if approached right. I can only hope that my startups can acquire the right strategic capital. Why? Because strategic investors are often your potential acquirers. In the right situation it can be a try before you buy investment for them and if you get them hooked on your product then you have downside protection (do you think your largest client would want to let you fail!?) … something to think about next time you’re out raising money …

R

So here is a suggestion to the community. Always allow the entrepreneur to invest along with each round in preferred stock. I’ve seen this used sometimes and forbidden other times. It should always be an option on the table. If i was an entrepreneur, I would insist on this upon on our angel round so every $ put in by the entrepreneur is worth as much as a $ by the investor. Sweat Equity = Common Stock. Cash should = Preferred since a $ should be a $. Unfortunately, this isn’t the case a lot of the time. This is why some companies can grow big, sell for a lot, entrepreneur put in a lot of $ but barely got anything out. $1 should = $1. I’m sure a lot of people will disagree with me on this one. 

So i’ve had the luxury of getting to know most of the top serial entrepreneurs in NYC and have asked most of them how they are raising money for their last venture. Here’s what I’ve learned … this is in no particular order but its 13 things i’ve seen being used lately…

1) Never put your own money in past a prototype (and generally get the prototyped paid for by someone else) 

2) Use convertible debt that converts at a discount to the Series A round (discount, between 5-30%, depending on how long between when that debt was issued to when Series A closes) 

3) Sometimes allow for additional warrants or for the investor to double investment at original valuation at time of Series A 

4) Never assign a valuation until a Series A (not worth the mess) 

5) if you’re investing your own cash, have your wife or uncle do it through another entity in the form of debt (no reason to put your money in as common stock when you can get preferred) 

6) When you raise a series A, say you are raising a $5MM Series A at a $15MM valuation and allow for any investors for under $1MM to come in as convertible debt (this avoids the issue of raising angel money at one valuation and trying to raise a Series A at another simultaneously) . likely this valuation is too high but give some room for investors to negotiate it down. 

7) Never state your valuation in raising money in your presentations. First get interest from investors before talking valuation. Get the investor hooked on the company before any negotiations and you’ll have a much friendlier negotiation. 

Incorporate as a Delaware C-Corp (unless you are an insurance company, then use Bermuda- otherwise no exceptions) 

9) Create vesting in your initial shareholder agreement so your investor doesn’t try to change it later. However, give yourself a good vesting schedule based on a mixture of time and milestones and instead of 3-5 year vesting, use 18-24 months. It’s a lot easier to demand vesting when there is none then demand changing vesting terms. 

10) Always have an option pool. Between 10-20% (size of option pool is open to debate) 

11) Always create full business plans. It shows you can do it though no one will really read it and it’ll be good to have for yourself. Make sure includes: Exec Summary, Profile (elevator pitch + team), 1 pager, PPT Deck (5-20 slides), Milestones, Use of Funds. Preferably have: Full Bplan & Full marketing Plan & Product Rollout plan and financial model. Use this in stages. First send the profile then 1 pager, then use the Deck in person then the Exec Summary  then Milestones & Use of Funds. Then send financial model and other plans at once if you get that far. Also, be practical on your projections, never use the word conservative and when you discuss your financials, state the risks and assumptions and potential issues, don’t let the investor do it, do their due diligence for them. 

12) Have a meeting with a potential acquirer and get some level of interest, and if possible an offer to acquire you as is (even if its 50 cents a double cheese burger). This shows that there is serious interest and that you have thought towards the exit (the only thing your investor cares about). It gets people excited when they hear you already have an offer for the company (don’t reveal the offer or who it is from until much later). 

13) More management team, less advisors. Too many advisors makes you look like you’re window dressing. Unless your advisors are investing cash (then list them as investors not advisers) then don’t list many. 1-2 Spot on advisers is perfect. 

So every VC deal and fund looks a tad bit different - so i will generalize for now. As i’ve said earlier, a major issue in the financing of a young company is at what point, does it not make any sense at all to keep self-funding a company (if you can help it!!!) and the reason is your dollar as an entrepreneur is not worth as much as a professional investors’ dollar. My suggestion to solve this issue is to allow the entrepreneur to investor in preferred stock along with the investor from the day they take on their first dollar of outside capital. Now some people let this happen but most of the time, the entrepreneur doesn’t stop for a second to realize he’s pissing money away. This usually happens at the angel state when the entrepreneur is funding the company along with other people. My contention is the day you take on outside $ (as long as something tangible exists - it’s your job to get a demo/alpha product live to show to real investors, however if you have to do it) is the day you should be able to invest $ along with the outside investor so that everyones interests are aligned.

You have no idea how many entrepreneurs would have been much better off had that they throw their founders stock out the window and just took the same $ they put into the company and put it into the Series A preferred stock. Anyway… til next time …

This is a short follow up on my last note, my keynote from The BootStrapper Venture Summit.

There are a number of differences between Common and Preferred Stock. The primary difference I would say is that preferred stock is far more protected than common stock from such things dilution. I’ve seen a lot of comparative numbers but Preferred Stock can be worth anywhere from at least as much as Common Stock to 5x as much as common stock. Also, when a company sells, preferred gets paid before common stock.

So what’s the point of this post? If you’re an entrepreneur, be conscious of what you’re giving away and if you’re a newbie investor, be conscious of what you’re getting.

Some other clauses to consider, Liquidity Preference & Participating Preferred but i suggest reading up on the specific differences at a great site - Venture Hacks
. Nivi can explain it a lot better than I can.

So I thought i would share notes on my keynote talk from the BootStrapper Venture Summit.

I spoke about the contradiction in the name of our summit, BootStrapper Venture Summit. Upon first glance, one might think that Bootstrapping and Venture Finance are polar opposites. However, they are not mutually exclusive. The most important question to ask yourself when it comes to how to finance your venture is “Do you ever plan on raising outside capital?”

The answer to that question should determine how you go about raising money. If you never plan on raising any outside money, then it makes sense to Bootstrap. However, if you think you may need to raise outside capital at any point (an IPO does not count) then there is a distinct point in the history of your company, where you should not be self-funding your venture. Now, before i say this - i need to state that it does not matter if you self-funded it with $50 and a handshake or $5,000,000, the point in the lifecycle of the company is the same and your first round of investors will likely value you the same way.

The day you launch your product into the market and generate your first $1 of revenue, should be the last day that you put your own money in the company. The reasoning is simple: Every dollar you put into your company goes in as Common Stock vs. Preferred Stock for your investors. Furthermore, the odds are (especially in NYC) that you will get the same Series A valuation regardless of whether you put that extra $250,000 in your company. Yes, many (most) investors will disagree with me but I’d venture a guess to say that if you look at the actual term sheets and compare them side by side for companies whose founders put in more $ after the product launched vs. stopped self-funding, they would look very much the same.

Of course, there are exceptions, sometimes you can’t raise outside capital and you have to invest yourself (i will do a follow up post in the future about how to invest cash in your own business after your launch) and sometimes you need to put a few more dollars in to prove your model. However, for all practical purposes, the day you launch is the day you should be trying to raise outside capital and stop putting your own money in. Your money is simply not worth as much as other peoples’ money.

Is this logical? NO. Is it the truth? Ask your happy go lucky local VC.

It’s funny / nostalgic to see all these negative comments about Richie. When I first met him, I had the exact same negative reaction to him as well (I even wrote a mean email to [newtech] about Richie, haha). I had never seen someone who was so unafraid of / unabashed by self-promotion, free-expression, community participation, whatever you want to call it. Having said that, over the past year, as I have had a chance to interact with Richie more closely, and maybe Richie started to grow on me, and I have begun to see how valuable of an asset Richie is to the community. He does reach out to everyone, and he does (at least attempts to) talk to everyone, he makes himself available to anyone that may have an idea for a company, who may lack the technical, logistics knowledge around how to bring the ideas to life. He does have some credible connections into senior investment professionals at local VC firms and angel groups. And he has introduced me to some incredible entrepreneurs, that I brought to our firm to meet with a couple of general partners. He may not have started a Digg or a DoubleClick, but he does know how to launch web businesses that are useful to the communities, and has very valuable industry contacts. I have gone to a few very informative events where Richie helped put together a very knowledgeable group of industry insiders as panel. Some people complain about the lack of ecosystem in NYC that nurtures and provides collaboration for tech community.. I think what Richie has tried to do, is exactly what we need to do (we need more of that), in order to bring collaboration and communication here.. Honestly, some of the things Richie does, still bother me, but I really appreciate all the things he has done and respect him as a valuable member of the NY tech community.
So please don’t be so quick in judging Richie.. Try to have an open mind, and invite him out for a drink. If you still hate him after that, I’d be surprised..

So one of the people that applied to the BootStrapper Venture Summit told me a story about how he raised capital … so i’ll repost it for everyone …

It is imporrtant to recognize that I always defined an angel as looking for investor-partners, not just investors. In addition to a good business idea is the acceptance as who I am as co-founder, including the appreciation of how much we could produce by bootstrapping. I found my first angel investor by placing breakfast invitations under the hotel doors of all the attendees to a later-stage investor event. Two people came to my speciality coffee room, one became my first investor and the other sponsored another angel forum. I went to this angel forum which is where I met my 2nd angel investor.

Everyone along the way has been thanked, and thanked, and thanked as many times as possible. This requires no extra money other than time.

Next form of bootstrapping is going to as many events as possible and flying in-and-out in the most inconvenient times possible, but never staying the extra day since you can easily spend an extra $500 to $750 on the extra day. Going to events includes participating as a panelist, pitching or just working the audience.

Another form of bootstrapping is to comment and respond to as many professional fund raising news stories and blogs as possible.

A final form of bootstrapping is to maintain an ongoing list of potential investors and to update them everytime a major milestone is achieved. This is a subset of the information provided to existing investors, whom by the way will usually invest more than once if they are treated as a partner- not just an investor.

Each of these requires persistence and professionalism. There are numerous tricks-of-the-trade that can be learned, but have to be embraced and accepted as part of the ongoing process to be successful at raising capital and growing a company.

Brian Javeline
President & CEO
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