Bootstrapper.com - Confessions of Serial Entrepreneurs

I was recently approached by a friend who runs a development company where he wants build launch versions of products (or take existing companies that need something new) for primarily equity. This is a friend who has done work and favors for me in the past. It’s interesting, in that there are developers on the market in nyc and also a lack of developers in nyc even by well funded companies. Having captive development is a very valuable thing. Separately I was approached by a friend who runs an investor group to start an incubator where he would put in some cash and help build out the companies. Together it could be very interesting. As for the moment, I’m focused on launching www.ApparitionAds.com and making it successful.

PS. I’m a big fan of betaworks.

Hey everyone,

So today’s post is a potential investment structure I was thinking about. So if I were actively investing right now (launching a company next week so I’m not investing at the moment) my thesis is that I would only invest where I a) understand the market b) know how to market & monetize the investment c) can add a lot of value beyond a check. Due to the reach of Bootstrapper and my somewhat unique place in the industry, I’ve gotten to see a lot of different structures and fundraising models from both sides of the coin as well as from the rim in between.

At some point I’m likely going to use a version of this model and start The Bootstrapper Fund but that’s not for a while.

Thesis: Investing in companies where I can add immediate value and essentially invest as a co-founder in the company.

Caution: From a financial standpoint my money would be very expensive, I don’t deny this – but from a practical standpoint, I would be investing in companies where my value isn’t my money, it’s me and my partners. The first thing I would tell founders is if they can do it themselves do it themselves and avoid my money but if they would like to have me as a partner and think I can help a lot then my money makes sense.

Sourcing: Only companies that I either helped dream up/incubate and recruit a CEO or founders I know personally or through very close friends and can trust. If I were to look at something from outside my immediate network, I would need to get to know the founder very well first.

Value add: Brainpower first, resources second, money third. Anyone that has ever taken me up on my offer of a free cup of coffee and an hour of my time can attest to my rapid fire brainstorming and connecting.

Rationale: I would look for companies where I would be critical factor in making my own investment successful (in my mind at least, hehe). Ie: I could have seen myself founding the company or coming on board as an executive because I can help a lot.

Post Investment: I would help the company source attorneys, bankers, backoffice, development and marketing services and monetization, find the partners and structure the deals to ensure the best use of cash. Literally help plug every hole I can find (I’ve got a bunch of friends who can fulfill all of the above and have done it successfully). I would then likely write or rewrite the marketing plan and put together all the pieces for execution and likely make 20-30 introductions to the founder (and many more in the future). End result: By the time my money is spent, we’ve likely optimized all of the services the company needs and hopefully set up a marketing partnership or monetization piece that can help make the company successful.

The Structure:

I would look at my investment as coming on board as a cofounder since I would be very active immediately. My investment structure is not based on valuation or financial engineering, it’s based on people. If there are 3 partners, I would likely look for 25%, if there are 2 partners, I would likely ask for 33%. (range would be be between half a partnership stake and a full partnership stake depending on how much the company needs my help and possibly based on business development milestones I can do for the company).

Stock Class: Preferred stock Series “Boot”

Liquidity Preference: 1X liquidity preference (I don’t believe in more than 1X even if you can get it- just doesn’t sit right with me)

Participating Preferred; Not in the traditional sense. I would want a note for the amount I’m investing (not convertible at my option) with the goal of getting my cash out of the deal as soon as possible. (I’m not putting in a lot of cash so it wouldn’t effect the company much)

Board seat: 1 board seat (regardless of size of the board)

Participation Rights: Ability to participate in each round though I would likely not exercise it.

Founder Lockup: 4 year vesting with acceleration upon cash flow positive and return of my initial investment. (not always feasible) Strict non-compete and non ability to start other companies until my investment is paid back. (I want the founder dedicated to my investment, if its at the very early stages where the founder needs a day job until its live that’s fine but I don’t want someone running 3 businesses – I don’t mind working out terms where we can replace the founder with a CEO and let the founder be on the board and planning for this but if there is still startup risk im not going to bare it myself. (this is one of the reasons I don’t raise pure seed money, I have interests in several companies and I wouldn’t take someone’s money until I’ve proved the model – with the exception of someone who can help me prove the model – and understands and appreciates the risk.

I would put in dollars at one of the following levels:

a. Pure seed / mid alpha: $5,000 - $25,000

b. Alpha: money used for launch: $25,000 - $100,000

c. Beta: money needed for light scaling post proof of concept: $100,000 - $250,000

Now what would I look to provide at those levels: I would look for companies where I know I can make an instant impact through my experience or relationships. I would look for advertising technology and advertising arbitrage businesses, businesses with a proven direct response model that needs to scale and sites that already have a lot of traffic and need to figure out how to monetize it, occasionally a fun social idea (but would put in very little cash) and productivity technology that solves a personal problem for me that I think has a larger market that I can develop the marketing strategy for myself.

Why those things: That’s what I know – basically stuff that I know how to market or monetize so if I had to take over as CEO, I could with confidence. I don’t want to ever do this but I won’t invest in anything I couldn’t practically figure out how to build into a company myself. It’s simply a matter of understanding the risk, if I can’t understand the risk, why risk it?

The other advantage of that is any investment would be one where I can instantly add value and help grow the company and hopefully increase the valuation. Ie: due to my industry relationships, I can market online advertising companies as well as anyone so that’s something that excites me – which is why I love the company I’m launching – www.ApparitionAds.com - I can roll it out myself.

Why would I invest like this? Well, there are plenty of people with deeper pockets than me that can invest more cash. There are also plenty of funds that have analysts and can do extensive due diligence. I’m a single person with a day job? Who am I to think I can out research a professional?

Doesn’t this sound like incubation? Yep, it’s a form of it. I tried incubation once and set up a virtual incubator a year and a half ago, ran into a lot of issues because I was taking on companies where I had to drive them too much. Adding value is one thing, being the lynchpin is quite another. One of my friends founded a successful incubator – www.nextinternet.com and they are doing very well. The crux of my approach is that it would be a situation where I can add a huge amount of value but still have a strong CEO to drive the company forward.

Didn’t most of the incubators fail? Yep, CMGI, ICGE etc… lost billions. They failed because they were fully funding companies. My structure is very lean and protected.

Aren’t people doing this right now? Sure. There are similarities to a number of funds including: First Round, HermanVC, Ycomb, NextInternet, Genacast etc… and I’ve liberally borrowed from some of the better models I’ve seen ☺

Why do I think it will work? I have no idea if it will work but I’ve ran it by friends who said they would be interested so to me that’s good enough. The other thing is this doesn’t need to be a full fund, it’s really a way to do active structured angel investing/incubation.

What does everyone think? Who would want me as an investor? Am I an asshole? Do I make any sense? feel free to chime in or reach out to me at say what you think rich at bootstrapper dot com.

So I just did a review of the Term Sheet Generator that Wilson Sonsini Term Sheet Generator, a great workflow tool they put together to shed light into the term sheeting process. It takes about 45 minutes to go through the process and the end result is a complete term sheet. There are a number of great things about it including data on standards throughout the country for a number of terms. It allows you insight into digging into what goes into the term sheet. Major Kudos to Wilson for opening the shed on this one.

I talked to Partner in charge of it and gave them the following suggestions, which they said they hope to incorporate into the next version.

1. offer standard fully complete term sheets to download from the home page so there’s something to see a as a starting point.

2. Use functional examples that shows how each term and variant impacts both the investor and founder in live scenarios

3. All the data should be available for download from the home page

4. You should be able to input a term and pull up samples and data on it so an entrepreneur negotiating a term sheet can see what is standard and compare it to the one he just got.

Overall, great work! The more transparency into the process, the better companies we will build.

Hey everyone,

So tonight was another great night of NYC Entrepreneur Week and we had a great panel moderated by the very bright Maureen Farrell at Forbes and featuring Gil Beyda at Genacast, Chris Fralic at First Round, Amish Jani at First Mark, Mark Davis at DFJ & Matt Turck at Bloomberg Ventures . It was probably the best venture panel i’ve ever been to as everyone on it was open, refreshing and sharing tips, tricks and real information about pitching for money and your chances of success. Also our panel was primarily entrepreneurs who turned into VC’s (went over to the dark side!) and shared perspective from both sides. Very rarely do you get more than canned answers from investors, usually its polished company line, this was real information.

I also happen to be friends with a bunch of the guys on the panel and figured I would do something different so i did something that i think was a first. I got up and introduced myself as a co-founder of Nycent and related to the audience my real world experience with the panel.

First, I said how I met everyone. Chris I had met through a friend of the founder of a portfolio company, Gil i met through a bunch of different ways at once, Matt I actually met on www.asmallworld.net, Mark I met by reaching out to him through his blog and Amish I met because i pitched him (at an event I both marketing and was unprepared for!).

Out of 5 panelists, 2 of them i had met through non personal sources (social network and blog) so there is hope out there for the unconnected!

I then went even further and shared that 2 out of the 5 panelists passed on funding my startup (actually 4/5 passed on it but I forgot i pitched 2 of them). Yes, that’s right 4/5 of the panelists passed on my venture and i still am on great terms with them. Mark actually was the inspiration for starting the company (and his firm passed!).

In fact that only 1 of them i didn’t pitch was Matt (Matt took the position at Bloomberg as I was getting underway - we had lost touch and if we had reconnected a few weeks prior to that, i probably would have offered to make him a partner in the venture - as we had tried to do a startup together before but had to drop it due to a lack of time)

In my defense, I never seriously tried pitching it hard because the product wasn’t ready for prime time and I don’t want to take on money until i know it works but still!

Also, Gil had interviewed a potential hire for me as a favor last week and in the middle of the panel, he actually said “i’m going to back him now at a higher valuation”, which was pretty cool, I don’t think i’ve ever heard anyone offer to back someone publicly before. Now, I’m not sure if he was serious or if I would even want to raise money at this point but it was interesting.

The point of all this is that you need to keep on networking and build real relationships that transcend a no - if you want to be successful in the long run.

So here’s something to chew on…the average fund charges 2% management fee and 20% of profits of the fund. Then the fund makes an investment in a company and last i checked the average founding team (on a good day) ends up seeing around 20% of the sales price of the company upon exit (assuming all went well and good) and saw an average salary of 100k a year. Let’s say the company raised $20MM over the life and that the core management team is 3 people, 2% of that would be around $400,000 a year or $133,000 per founder. (these are hypothetical) but if you look at the numbers the entrepreneur ends up seeing equivalent return that the VC sees (management fees = salary, carry = equity value) so it actually works out. I’m an entrepreneur (though i’ve self financed most of what i’ve done to date) and you know what, when you think about it, the model makes sense.

Hey everyone, a reminder to check out the Bootstrapper Summit, our very own Venture conference featuring the top investors in the country. Check it out and register today!

Richie

So I had a conversation with a fellow blogger in the startup venture world who is currently trying to raise a cool young company some money and he said the following “Yeah we’ve gotten the “you guys should just raise angel money” several times. I’m like, “We’re only looking for $1-$3M, if we raise angel money what the fuck do we need you guys for then?”

This is a chain of feedback i’ve heard a lot recently, where funds telling entrepreneurs to raise angel money or bootstrap. It’s an interesting line of thought given, 9/10 times that was the original goal of the entrepreneur (who wants to give away stock when they can avoid it?) but the current angel market for the most part is dead. Why? Say someone was worth $10MM and was actively investing 5% of his net worth (what’s suggested for Angels) or $500,000. This person lost 50% of his net worth and is now worth $5MM. His allocation for new Angel Investments = $0. Now repeat times 100. People still have lots of cash but are much less lilkely Angels.

Also, in terms of Bootstrapping, I highly recommend it of course but given the markets, every entrepreneur should always be pitching for money even if they don’t need it to raise awareness and have dry powder. No one knows when or where we are going in this economy so it’s always better to have cash on hand. If you bootstrap too hard, you risk breaking your laces before your shoes whither.

Today’s post should be valuable to anyone looking to raise money out there. My warning: do NOT rely on Angel Groups for funding. They have been hit very hard lately as almost everyone in the country has had half of their net worth wiped out. Anyone approaching an angel group should expect much tighter diligence and lower valuations. I am a founding member of a new group and we’re no different, it’s a tough environment and hard to get checks out of people. It is even harder in a group setting. In a strong market, groups are great because of groupthink. One member wants in and can sway everyone else, however now that it is a down market, one member saying no can easily sway the whole group to no. My advice is look for individual angels. It’s the best shot you have at raising early stage money. If you’re thinking of seed stage VC, that will be a challenge as well, most venture funds have dropped back to be slightly later stage than before (at lower valuations of course) so the early stage money is drying up.

This is great news if your funded or profitable however as limited money means limited new competition.

I am often asked what VC’s typically look for when performing analysis/due diligence on a business plan. Below is a plain and simple outline on what they look for:

1. Cover Page

1. Table of Contents

1. Executive Summary
   1. Company Intro
   2. Concept and Mission
   3. Mission Statement
   4. Strategy
   5. Company’s Products and Services
   6. Market Analysis and Trends
   7. Competitive Analysis
   8. Value Add of the Company
   9. Financing Amount, Purpose and Time Span
   10. Milestones
   11. Management Profile
   12. Financial Summary
   13. Exit Strategy

1. Company History and Current Status
   1. How Company Started
   2. Founders and Personnel

1. Revenue Model
   1. Nature of the Business
   2. Profit Margins of Industry

1. Technology, Products and Services
   1. Description of the technology (include diagrams)
   2. Value Add
   3. Competitive Advantages
   4. Proprietary Nature
   5. Current State of Development

1. Market Analysis
   1. The Overall Industry
   2. Market Segments Targeted and Rationale
   3. Customer Profiles (needs met/unmet, buying patterns)
   4. Describe how the company’s products will meet the needs of intended markets
   5. Describe all industry forces (suppliers, buyers, threat of substitutes)
   6. Barriers to Entry
2. Competitive Analysis

1. 1. Competitor Profiles (History, Segments Served, Market Share)
   2. Provide Solutions to Breech Entry Barriers
   3. Competitive Advantages (IP, etc)
   4. Anticipated reaction from competitors upon market entry

1. Sales and Marketing

Sales

1. 1. Material, Labor, Overhead Costs
   2. Methods of Promotion and Distribution
   3. Revenue Model
   4. Customer Selling Approach

Marketing

1. 1. Identify customer purchasing decisions and trends
   2. Identify current needs served and unmet by competition
   3. Identify company’s positioning (quality vs. price, innovator vs. adaptor, follower vs. leader, private sector vs. government)

1. Management Profile
   1. Background Information
   2. Capabilities
   3. Management Gaps
   4. Organizational Chart

1. Financial Strategy

Financial Operations

1. 1. List of all loans and terms
   2. Operating Budget
   3. Milestones
   4. Pro-forma income, cash flow and balance sheet

Financing

1. 1. Breakeven Analysis
   2. Amount Needed, Time Period, Total Amount Required
   3. Capitalization Table showing the amount raised and the percentage of ownership
   4. Exit Strategy

As a proud SIIA Previews industry partner, I encourage you to apply to present your early-stage content company before an audience of more than 200 potential business partners, customers, investors, and acquirers at the Software & Information Industry Association (SIIA) Previews event January 26th, in New York City.

The November 21st deadline is fast approaching for innovative start-ups interested in presenting at this third annual event. For added value, each Presenting Company will have a table-top display during the Networking Reception that concludes the event.

There is NO FEE to apply - do so NOW
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…