Like many of you, I attended my first virtual conference a few months ago and while the content was great, I missed the networking that I value so much from conferences. 

Now, I’m planning my second virtual conference of my own and I’m prioritizing not only implementing technology that supports networking, but making sure that I create a culture in the conference around actually using it.  What follows is some advice for both conference organizers and attendees to get the most networking out of an event.

Principle #1:  Talking heads put people into “passive mode” and they check out.

Solution: Mix up engagement models throughout the conference. 

Sure you can have keynotes and panels if you must, but then have breakout sessions where people are encouraged to talk, question and share.  Build in plenty of “white space” – time where people can engage with the networking opportunities your virtual conference has provided.  And finally, provide opportunities for both one-on-one networking and small group interactions.

My first virtual conference had built in networking functionality, but I really couldn’t figure out how to use it, and when I did reach out to others, they apparently couldn’t figure out how to respond either.  Online networking is as much a “warmware” issue as a software challenge.  Conference organizers need to not only have software that facilitates networking and collisions, but they need to train users to make sure that they understand how it all works and that using this functionality is expected of them.

I started planning by thinking about how networking happens at face to face conferences.  There were six main ways that I connect with my peers at conferences:

  1. “Collisions” where I run into peers in the hallways at events.
  2. In session connections – it can be rude, but finding someone you know and sitting next to them and chatting when appropriate.
  3. “Clusters” where three to five people meet up casually in-between sessions and chat.
  4. Meals and Cocktails where you seek out people you want to meet with and have lunch, dinner or cocktails with them.
  5. Trade show style booths are also a way to meet with vendors you’re hoping to connect with.
  6. Pre-scheduled meetings are a more intentional way to make sure that you meet up with the people you need to see at an event.

All of these are based on finding a physical space or place to connect which seems to run counter to the structure of a “virtual conference.”

When planning for my upcoming conference, I thought of it not so much as a website, but as a physical event space.  Here’s a blueprint I came up with to designate the reception and checking area, hallways, breakout sessions, plenary sessions, and vendor booths. 

By breaking all of the different ways that people would interact with each other into a physical space model, it makes it easier for conference attendees to get a feel for how they are supposed to interact in this unfamiliar virtual conference space.  As an attendee I can see the expo hall options, the network drop-in sessions, one on one opportunities and the presentation spaces.

To make this work, we ended up doing something a bit unconventional.  We used Hopin as the reception and networking areas for the conference, and Zoom for the Plenary and Roundtable sessions.

We did this because Zoom is well established and familiar to everyone.  We needed a platform that our speakers could plug into easily and that would have familiar interfaces for presenters to share their screens while viewers had the ability to connect via chat.  But Zoom means talking heads and we wanted to break out of that mold. We really like the concept of Hopin and it has some of the best networking options we’ve seen, but the Main Stage is quite difficult to navigate and getting someone backstage is tricky.  Once they’re there, sharing screens and seeing what you’re presenting is not so easy.  Rather than risk a disaster, we opted for the dual platform.

Hopin’s networking allows us to facilitate multiple types of networking on the platform, which is really great.  Here are the ways we used Hopin to facilitate connections at the conference:

  1. Hang out rooms – We created Hopin “sessions” where participants can join in with smaller groups to get to know each other.  These sessions are open during the entire conference, so attendees can stop by any time and see who’s in the rom.
  2. One-on-one Networking is a great feature in Hopin.  This zone automatically pairs participants who opt-in to be connected with each other for three minutes (or longer if they want to extend) and then the platform facilitates sharing contact information if they want to connect later.  I found this function to be fun and to be a great way to meet people in a way that I wouldn’t easily have available to me at a typical in-person conference.  It is similar to speed-dating networking sessions I’ve seen at certain events, but not typically at conferences.
  3. Wine-Down:  We’ve created an end of day small group networking opportunity for participants to grab a glass of wine, beer or cocktail of their choice and connect with others at the conference in a casual setting.  We supply sample discussion points to get things going, but those are strictly optional and people can chat about whatever they like.  We set up a wine sponsor who sent discounted gift boxes of high quality single serve wines to participants who opted in for that. 
  4. Trade Show Booths
  5. Impromptu Sessions with one or more participants

For the Roundtable sessions, we opened up Four Zoom Rooms so that each of the different breakout topics would have their own room.  With this structure, we were able to allow all participants to be able to turn on their video and microphones and actually engage in discussion.  (Of course, microphones go on mute when not speaking.)  We could host between 100 and 500 people in each of these sessions.

Plenary sessions where everyone is viewing keynote speakers or, in our case, venture capital pitches, were also done in Zoom.  This allowed us to switch rapidly between presenters and everyone was already familiar with the platform.  The key, though, is never to have more than sixty minutes with any one kind of interaction.  Keep it moving by switching up how attendees interact and their brains will be stimulated.

Final advice for attendees:  be proactive in how you approach a virtual conference.  If done right, attending a virtual conference with a good networking platform can provide you with MORE rather than fewer networking options! 

Look through the registrations (if available) and identify who you want to meet with in advance.  Learn the connection options and reach out to make connections with one or more people at a time.  Make sure you get contact information to follow-up with people you’re interested in.  If you have to miss a panel or two in order to make great connections, don’t worry.  Most virtual conferences record the sessions, so you’ll often have a chance to catch up on the content later while focusing on relationship building during the conference.

Shameless Plug:

If you’d like to see all this in action, and get great startup content about resiliency during the pandemic, be sure to check out the Colorado Capital Conference.  Even if you’re not from Colorado, this event is open to anyone and the speakers and pitches apply virtually anywhere.  We’ll have Brad Feld from Foundry Group to talk about many types of resiliency and some of the themes in his new book, The Startup Community Way: Evolving an Entrepreneurial Ecosystem  We’ll have Denver’s Mayor Michael Hancock sharing the unique resiliency the city has shown in responding to the pandemic.  Join us! 

If you are a startup CEO, or work for a startup – these are challenging times. The world as you know it is on hiatus, and uncertainty reigns. I would like to share some wise advice from my friend and fellow board member at the Angel Capital Association, Pat LaPointe from Frontier Angels in Bozeman, MT. This is advice that I hope every startup CEO in our community takes to heart.
Best wishes, and be healthy,
Peter

Dear <CEO> –

I hope you and your families and friends are healthy and staying safe. There is no “sale” worth jeopardizing your health. No meeting is worth exposing yourself or your team to something for which there is presently no cure. Please be careful.

I was running early stage companies in both Sept 2001 and in March of 2008. This feels EXACTLY like those situations. Fear and uncertainty reign. No one person has a completely accurate view of the situation because it is SO complex and unprecedented. In case you care, here are a few observations on how I would apply my own experience if I were running an early stage company today:

  1. If I was selling to enterprise or government buyers, I’d expect everything to stall. Sales pipeline will get rigor mortis and nothing will move forward for months. That means any revenues you were counting on from companies not already under contract will NOT materialize anytime soon.
  2. If I had contracts with cancellation clauses, I’d expect to see half my enterprise customers exercise those clauses. Government buyers don’t tend to cancel in the near term, but commercial enterprises will start shedding expenses UNLESS I’d already been able to PROVE clear cost savings for them. If my value proposition was about generating more revenue for them, they will STILL cancel because many of their clients/prospects will not be buying right now.
  3. If I had less than 12 months of cash on hand, I’d start preserving cash NOW. TODAY. It is incredibly painful to have to lay off people who you worked so hard to recruit and train, and who have worked so hard for your shared future and vision. But you have to think about the business surviving first so you will live to fight another day and have any hope of re-hiring people later. I would triage my accounts payable and stretch my vendors to 90 days or more. I’d call and tell them I was doing that, but I had no choice if the business was going to survive.
  4. Even if I had more than 12 months cash on hand, I’d move to conserve cash immediately. I’d defer discretionary expenditures. I’d look for opportunities to reduce my non-strategic expenses like rent or other things where I may be able to renegotiate the deals.
  5. I would look for opportunities for “customer financing” – getting happy customers to pre-pay for the next 12 months of product/service and offer something special in return.
  6. If I had a revolving line of credit, I would draw it down NOW. The interest cost is small price to pay for the security of the cash.
  7. If I had a termsheet on the table or was in mid-raise with “soft circles”, I’d expect it will fail. Venture funds will continue to invest, but only after a few months go by to allow them to reassess the market dynamics and even then the valuation they offer will be much lower even if there is no apparent reason for that. Angels already have “alligator arms” and are fast shutting down all investing until they understand their own personal liquidity. They are thinking about their families and their own health since the majority of them are over 60. I’d expect them to be cautious and slow-moving for at least 6 months. I’d look to find capital from family and friends and credit cards and second mortgages to stay alive. Another option…
  8. I’d look for opportunities to sell services to customers/prospects for short-term revenue flows to keep the lights on. I’d think about where my expertise is and how I can leverage that near-term to create value for someone.

Bottom line: act fast to preserve cash so you have more options 6 or 12 months from now. Expect the situation to get far worse than you may initially think (e.g. 20% unemployment; 8-12 weeks of “social distancing”; a big viral rebound in the fall of this year; fundraising rounds taking 12-18 months). If it’s any better than that, you’ll be ahead of the game.

I will never forget how my first big exit completely fell apart in the fall of 2001 and took many months to put back together (at a lower price). Or how I had bankruptcy papers on my desk in 2008. Or the incredible pressure of having to keep my family afloat and protect my staff – many of whom had become close friends and all of whom had families of their own. In both situations, I acted too slowly, was overly optimistic about how soon things would turn around, and pushed the company too close to the edge. I was too optimistic and overly confident of my own ability to impact a market being buffeted by forces far larger than I could overcome – no matter how hard or smart I worked. 

But we adapted, learned, and thrived. You can too.

We (Frontier Angels) are huge fans of you and your team and want to help.  We are still investing. What we’re looking for are companies who A) have good market traction, B) have the ability to ratchet-down their monthly burn rate, C) are sufficiently well financed to seize opportunities in the market, and D) have CEOs who are not prone to mistaking hope for judgment. Call anytime we can help with anything.

Stay well; act fast. Remember, YOU are the core of your asset. Take care of YOU.

First of all, you shouldn’t create an exit strategy for an investor – it’s actually the first question you should answer for yourself if you’re thinking about a startup.

The Exit Strategy – Cornerstone of Startup Success

You see, the exit strategy is about understanding who your customer is. Not the customer who buys your widget or app that you make, but the customer who buys your customer. The value proposition for this customer is different from the value proposition that you may have for your “first” customer who buys your product – the “second” customer who buys your company is much more important.

The second habit of the Seven Habits of Highly Successful People is “Begin with the end in mind.” This is more true for startups than anything else I know. Startup founders who understand their exit strategy are able to align all their strategies and people towards that single value proposition.

So how do you articulate a great exit strategy? There are six things you should think through carefully.

  1. Look at that past. Who in your industry is acquiring companies. Why are they acquiring them, and what patterns can you find in their acquisition activity? Specifically, if you can find 1) what is the average acquisition amount for companies, 2) what is the revenue multiple (how much the company was acquired for, divided by the trailing twelve month revenues for the company), 3) what drove the strategy behind the acquisition? Following these patterns will let you know who the likely acquirers are and how big you need to grow to be in the “sweet spot” for acquisition.
  2. Look at the future. What are the trends in your industry that point to your solution being a big solution to gaps that the big incumbents in your industry will need to fill? This is the Wayne Gretzky point to learn “where the puck is going and not where it is.” If you can be ahead of the incumbents and innovate, then you’ll be ripe for acquisition at a high multiple.
  3. Understand your values and the values of your acquirer. More than half of acquisitions fail because of values misalignment. You’re passionate about what you’re doing, so you want to make sure that your acquirer is also passionate about carrying on what you’re doing, but with ten times the impact in the communities you sell into.
  4. Build a team. I don’t mean the team on your “team slide” on your pitch deck. You need another team for your exit that includes direct employees who have been through acquisitions before, investment bankers, M&A transactional attorneys, and CPAs familiar with audits, valuations and transactions. You’re going to be acquired by professionals and you can’t take an amateur approach.
  5. Timing Strategy. You can’t define when you’ll be acquired, so you should always be ready for acquisition. I know a company who was acquired for $20 million before they ever had a customer, or an investment round. The two founders pocketed $10 million each for seven months of work. Early exits can be awesome, so long as you understand your early exit value proposition. Later, your value proposition evolves as you prove product market fit and gain many new customers which might be attractive to growth stage VCs or strategic acquirers. Even later you’ll have positive cash flow that may be attractive for Private Equity acquisition. The point is that you should know your value at each inflection point, know who you’re valuable to, and how much your company is worth at that stage.
  6. Know your acquirer. If you’re going to be acquired, it helps if the acquirer knows you exist. As you go through your timing strategy, you should define the potential acquirers and how their company is structured. Some acquirers drive M&A through the CEO and CFO, others have Business Development teams, others have M&A departments that execute the wishes of the board, and still others will drive acquisitions through product managers who bring in acquisitions to build out their product lines. Remember, companies don’t acquire companies, people do. You need to define who in the company does the acquiring and get to know them. Connect on LinkedIn. Write blogs and include them on the distribution lists. Go to trade shows they go to. Do podcasts, guest visits, and reach out via email introductions. The more well known you are as a thought leader and innovator in your space, the more likely you’ll be considered for acquisition. Don’t even think of being in “stealth”mode for more than a few months while you develop your MVP.

Investors don’t make money on your cash flow, so make sure you’re developing a capital strategy designed for growth. Investors only make money when you exit, so if you don’t have a great answer to the “what’s your exit strategy” question, then you’re not ready to raise capital since you can’t answer the question they’re really asking – how will I get my money back?

Interested in learning more about exit strategies, capital raising, valuation, term sheets and more? Check out the Angel Capital Summit, membership for both angels and founders at Rockies Venture Club and upcoming classes, workshops and accelerators for BOTH angel investors and entrepreneurs!

Measuring Impact has become a major challenge for impact investors.  The main reason is that for all their good intents, organizations that develop impact metrics ultimately end up trying to fit a square peg into a round hole.  Impact metrics systems struggle to compare apples and oranges in order to demonstrate that the social and environmental benefit can be measured in the same way that financial benefits can be.  As our Impact Landscape canvas shows, “impact investing” is not a vertical market. It is futile to try to compare the metrics for bringing education vs. clean water to a community. Both are important and someone will focus on each.  Ultimately, the metrics for both must be different. 

A lot of great work has gone into developing metrics for impact.  There are templates, sample measurements within various verticals, and thoughtful approaches to measuring impact without drawing too much energy away from the impact organizations whose outcomes are being measured.  

Our metrics thesis is not superior to nor a replacement of other metrics. We appreciate the values and intents behind GIIRS, B Corp Certification, IRIS, Guide Star, SOPACT (Actionable Impact Management), GRI and the SDGs, as well as gender lens metrics, diligence metrics, reporting metrics, performance metrics and others.  These are all great frameworks for a Rockies Impact Fund portfolio company to use in determining the best key metrics for themselves to use, along with their investors and stakeholders, to guide their actions.

Regardless of the metrics system used, one important principle is to think of metrics as something that happens on the front-end of a transaction, not just one of measuring whether the outcomes were successful or not.  Students of business process will remember the revolution that occurred in American manufacturing when W. Edwards Deming studied manufacturing process and found that in the 1950’s people were engaging in “quality control” by culling out the defects at the end of the manufacturing process.  He envisioned building quality in from the beginning of the process and greatly improved efficiency of American manufacturing.

What if we applied those same principles to impact investing metrics?  Instead of making investments and waiting to see if they produced the outcomes we had hoped for, we build impact metrics in from the beginning?

We view metrics in two ways.

Inbound Metrics – Is it an “Impact Investment” According to our Thesis?

Impact companies do not always present themselves with an “impact” label and it is important for us to be able to determine which companies from the flow of deals will qualify as “impact” investments. As such, we expect many companies approaching the Rockies Impact Fund and qualifying for investment will not need to present themselves as “impact companies”.  They may be focused on health, education, environment or other impact causes, but they present themselves primarily as a business enterprise. Because of this and because the Rockies Impact Fund will invest across multiple markets ranging from healthcare to education to agriculture, the Fund’s managers do not arbitrarily choose any one system to measure whether something is an impact investment or not.  Most existing impact metrics systems have a hard time telling us whether it is better to invest in a company that can provide education to one hundred students or to provide clean water to those same people. Instead the Fund’s Management uses a simple version of metrics based on Utilitarian Ethics founded by 17th century philosopher Jeremy Bentham[1] in which the moral choice was one that benefited “the greatest number of people with the greatest good.”  Rockies Impact Fund managers have added a venture capital twist to make it a three-fold metric that includes “…at the greatest financial return.”

The Rockies Impact Fund intends to measure each incoming opportunity against these three criteria of number, impact and return, each scored on a one to ten scale.  A company needs to have a score of 19 or greater, without a large standard deviation among the three scores to qualify for investment. For example, in the “financial return” category, potential for a 10X return in five years falls at “7” on the one to ten scale.

IMPACT
ASSESSMENT
SCALE
# of peopleDepth of ImpactFinancial
Return
(Multiple)
1UnknownNegativeNone
2TensNone0-1
3HundredsVery Low2-3
4ThousandsLow4-5
5Tens of thousandsLow Medium6-7
6Hundreds of thousandsMedium8-9
7MillionsHigh Medium10
8Tens of MillionsHigh20
9Hundreds of MillionsVery High30
10BillionsCritical50+

Rockies Impact Fund’s managers have evaluated their past investment portfolios and have found that approximately fifty percent of the portfolio companies under management in the Rockies Venture Fund I (32 investments) and Rockies Venture Management (40 investments) would qualify under these measures as being Impact Investments. The Rockies Impact Fund will invest in impact opportunities using these metrics where companies qualifying score at 19 points or greater.  Our goal is to create consistency in determining the amount of impact so that investors and Limited Partners can calibrate with a scale that is understood to all.

By “beginning with the end in mind” we believe that we can maximize social and environmental impact in the investments we make.  With a clear path to outcomes and pre-established metrics, we can create an “Impact Proforma” that we use just like the financial proformas that model future revenues and expenses for a Venture Capital Portfolio company.  By using the impact proforma we can help companies to adjust their strategies to maximize impact while also pursuing 10X investment returns.

Post-Investment Metrics – Is the Company’s Execution Creating Good in the World?

We develop post-investment metrics for each portfolio company based on their Primary Impact.  We use guidelines from existing metrics systems such as GIIN’s IRIS+ Thematic Taxonomy (Global Impact Investing Network) which provides suggested metrics for many, but not all impact types. 

We’ve struggled, as many have, to develop or select an existing single set of metrics for impact companies which we believe is impossible. One simply can’t use the same metrics for edtech and agtech and metrics that CAN be applied to both, would be Secondary metrics about how the company operated, thus ignoring the most import Primary impact output that the company creates. At the end of the day, we’ve determined that each company needs to set its own metrics for impact as a part of the Key Performance Indicators (KPIs) that they measure on a regular basis as a part of managing their business. That being said, using a consistent set of metrics, when available, such as IRIS+ can be useful, ultimately, each company has its own outcomes that it tracks and by focusing on Primary Impact, investors will settle on investment metrics that are based on the individual company’s outcomes.

So, for example, a company that uses telemedicine to reduce the cost of healthcare by keeping people out of emergency rooms and to increase access to health care by underserved and rural populations might set about measuring:

●        Number of people diverted from the emergency room (and the cost savings because of that)

●        Number of people in rural communities served.

●        Number of other underserved communities who gain access to healthcare.

Because the Rockies Impact Fund focuses on Primary Impact, these mission specific metrics make sense.  Each company is creating good by what it does when it carries out its mission. Additionally, these company-specific metrics are also their commercial raison d’etre, and thus, should be measured as part of their commercial KPIs even if they are not demanded for by the Fund.

The Sustainable Development Goals categories, for example, provide a good framework for understanding the scope of most impact investments. The metrics that fall under these categories will be well understood among investors who are analyzing various investment opportunities.  The Rockies Impact Fund’s management finds these categories to be useful and comprehensive and therefore we strive to work within this framework, while measuring each investment individually.

At the end of the day, impact investors want both a significant social and/or environmental impact, plus market rate returns.  Impact investors who develop inbound metrics find that they are investing in companies that create significant outcomes which can be modelled using an impact proforma.  Others who invest based on passion and cause alone may find that the impact they create is not as great as they had hoped.

All impact investing can be divided into primary or secondary impact and impact investors should understand the difference.  We define “primary impact” as impact that is caused by the company carrying out its mission.  Whenever a primary impact company sells its goods or services, there is social and/or environmental good that comes from it. Secondary impact companies, on the other hand, are measured by their practices rather than their business product.

We make the distinction between primary and secondary impact by noting that primary impact is created by “what” the does as opposed to “how” they do it. For-profit companies that have positive environmental impact by creating carbon-free energy, for example, create impact by the very act of carrying out their business and reducing carbon emissions. The more that the company grows and carries out its mission, the more positive impact there is in the world. 

Many impact investors focus on secondary impact, or “how” the company carries out its mission, than the mission itself. Certified B Corporations (B Corps) are a good example of this.  The qualifications to be a B Corp focus primarily on metrics surrounding business operations such as diversity, pay disparity, green business practices, etc.  These are laudable goals and are accompanied by rigid sets of metrics to assure compliance. 

Socially Responsible Investing (SRI) became popular in the 1970s and was known more for what investors did NOT want to invest in. An example of this is the elimination of investment dollars by SRI funds into the tobacco, alcohol and other industries perceived as negative by SRI practitioners.  ESG, or Environmental and Social Governance strategies, are more sophisticated and believe that companies that intentionally measure and act with environmental and social outcomes will do well in the long run.  Many practitioners however have found ways to meet the standardized ESG metrics while not passing the “sniff test” of more discerning impact investors.  Examples include British Petroleum, Slumberger, Clorox, Coca Cola, Conoco Phillips, Nestle and XCEL Energy. Clearly, there’s something that could be improved with ESG metrics and the companies that can manipulate the data to fit them while potentially harming society and the environment.  This practice of using metrics and certifications to make carbon generating companies like British Petroleum and Conoco Phillips is called “greenwashing” and impact investors should keep their eyes out for true impact vs. greenwashed impact.  By distinguishing between primary and secondary impact, we eliminate much of the opportunity for greenwashing.

Measurement of primary impact,  tells us what the company does and how it impacts communities, economies and the environment.  Take, for example, PharmaJet.  This is a company that makes a needle free injection system for vaccines.  The PharmaJet injector is small, requires no batteries or electricity to run, can be operated with minimal training and can be used thousands of times before replacement is needed.  The PharmaJet capsules that hold the vaccine have no needles, so every time one is used, there is a diminished likelihood of needle pricks suffered by health care practitioners.  They also cannot be reused by drug abusers or reused by healthcare practitioners in undeveloped countries.  Other benefits include PharmaJet’s more efficient delivery which cuts the amount of Polio vaccine needed by up to 30% for each injection.  Given the world-wide shortage of Polio vaccine, the impact of being able to inoculate 30% more people with a given amount of vaccine is significant.  The time to administer a shot with PharmaJet’s system is almost half of that of using needles, so healthcare workers can provide twice as many vaccinations in a community in a given period of time.  Additionally, many people are needle-phobic and they fail to get regular vaccinations for influenza and other diseases, leading to global health vulnerabilities when significant populations are unvaccinated.  The pain free, needle free PharmaJet system eliminates the excuses for these people to avoid vaccinations and can have massive impacts in global health outcomes. 

These are all Primary impacts that come from using PharmaJet’s system.  The company is not B Corporation, SRI or ESG certified, but it does more good with each unit sold than BP does in a year.  If we are going to understand what we mean by impact, we will need to distinguish between Primary and Secondary Impact, because they are clearly very different metrics and will have very different impact outcomes.

To be clear, ESG, SRI and B Corporations have done good things to raise the bar for business practices in many companies but impact investors should understand the risks or relying too heavily on these metrics.  But a company can do both primary and secondary impact – Just because a company creates primary impact through carrying out its mission does not mean that it cannot also carry out secondary impact by following best practices for sustainable practices within its organization.

 By focusing on primary impact, impact investors could avoid the challenges of ESG metrics systems and the potential for greenwashing that they enable.  Investing in companies whose primary mission entails doing social and environmental good avoids the greenwashing and self-justification that dated metrics systems could allow. 

Rockies Impact Fund - Venture Capital Fund focusing on full market-rate returns on early stage Primary impact companies.

If you’re interested in learning more about impact investing in your portfolio, are an accredited investor, fund, foundation, family office or CSR investor, please contact us about becoming a Limited Partner in the Rockies Impact Fund.  The Rockies Impact Fund is a full market-rate return targeted Primary Impact Venture Capital fund that targets early stage private impact companies in the UN SDGs focusing on healthcare, education, agtech, economic development and sustainable cities.

Peter Adams is co-author of Venture Capital for Dummies and serves as the Executive Director of the Rockies Venture Club, the longest running angel investing group in the U.S. 

Peter serves as an Officer on the Board of the Angel Capital Association, the North American association of professional angel investing groups.

He also runs the Rockies Venture Fund, an early stage venture capital fund and Rockies Impact Fund, investing in social and environmentally oriented companies. 

Peter is also the founder of The Rockies Venture Institute, the Women’s Investor Network, and BizGirls.org, a non-profit CEO Development Program for young women.

It’s that time of year again! RVC’s HyperAccelerator is back for a fresh, new, June 18th installment focusing on Impact Ventures. This is our sixth run of the gamut, this time with the support BSW Wealth Partners and the Colorado Office of Economic Development and International Trade.Take a look at these companies and see if you think they are all “impact” – doing good through social, environmental and economic development. We’ve spent a lot of time thinking about impact and what makes for a good impact investment, so we’re excited to work closely with this cohort of impact companies to push their programs forward with strategy and venture capital funding readiness. You can learn more about how we think about impact investing here. Join us at the Soda Pop Garage (2150 Market) on Monday, June 25th at 2pm for our Demo Day, where our freshly (hyper)accelerated ventures will pitch for you, the public. Register today!

 

Achroma plans to develop a blockchain powered loan platform to help remove underlying bias in the loan system. Using a blend of anonymity and data analytics, this FinTech/blockchain hybrid is hoping to help loan seekers feel sure that the system is working for them.

 

Brainitz is an EdTech company building a platform for teachers to create interactive videos. CEO Clint Knox is a teacher by trade and set out with the goal of streamlining the teaching process by giving students the teacher tools to help them teach outside of the classroom. Brainitz achieves this by integrating questions directly into video lectures.

 

 

EnVision Meditation uses scientifically backed techniques in order to guide users through daily 10 minute visualizations meant to provide empowerment and self improvement. The benefits are meant to reduce stress, fear, worry, and doubt, and increase confidence, motivation, focus and awareness. The company reaches users through its app of the same name.

MFB Fertility creates affordable medical devices and digital health solutions to help women better monitor their own hormonal cycles. The Ovulation Double Check is the FDA compliant, flagship product the company produces to help women understand when they are hormonally prime for pregnancy. MFB is now producing a take home device and an app that will help women monitor their hormones for purposes beyond fertility, such as detecting early stages of menopause. MFB Fertility is a recipient of the OEDIT Advanced Industries grant.

Starfire Energy utilizes clean energy sources to in order to produce ammonia. Using proprietary technology, Starfire makes this process easier to descale and ramp. The company hopes that it can produce nitrate to help power companies generate clean power storage and fuel.

 

Storion Energy. is developing and commercializing advanced batteries for the large-scale storage and delivery of renewable energy. Storion’s redox flow battery provides a blend of economy, performance, and reliability. Storion continues development of next-generation technologies to increase performance and drive down costs. Storion hopes to drive a shift in the energy industry by solving the long known ‘peak hours’ problems of renewable energy.

Synthio Chemicals is a developer and contract manufacturer of fine and specialty chemicals. The company uses novel continuous manufacturing techniques to produce specialty chemicals on a continuous rather than batch basis. Synthio is able to produce chemicals at a price and purity ratio drastically superior to competitors using proprietary tools and techniques. Synthio has broken into the pharmaceutical industry with intermediaries as their opening move. Synthio Chemicals is a recipient of the OEDIT Advanced Industries grant.

 

In light of the recent SCOTUS ruling, we thought we would talk about an economic model that helps us understand discrimination and voting with your dollar. How your preferences affect the price you’re willing to pay for a product or service directly correlates to a business’s ability to stay open. You wouldn’t go to a burger joint that was dirty or had terrible service if the burger place a block away had the same prices and was clean or had better service, and we can explain it with economics.

Bakers Green and Blue

Anyone who has sat through Economics 101 knows this graph. It’s a basic supply and demand chart with two bakeries and the market of buyers. Bakery Green is charging Y more than Blue Bakery for reason A. In a normal scenario, Green must lower their price or go out of business as Blue takes all the business they can handle (Blue could, in theory, raise prices to match Green, but that model gets complicated as we factor in behavioral economics and the price elasticity of demand.). In the traditional, basic model, Green just has higher costs. Maybe the owner wants a higher salary, maybe the business had to take out loans at a higher rate, with the result being costs that are higher. If that price is as low as Green can charge, then Green will eventually go out of business.

Now let’s abstract a little. What if reason the price is difference, Y, is not a dollar amount? Common examples of this would be that Green is further from town than Blue, or perhaps Blue is able to keep the line short while Green has a 30 minute wait. In this case, we’ll say that Y is difference in beliefs between you and Green Bakery’s management. In some cases business will fail slowly as a result of this type of disagreement as social norms shift, while in some cases firms go out of business rather quickly. For some customers, Green will not have this additional cost Y and will cost the same as Blue. For some customers, Green’s preferences could even align with theirs, adding to business, but so long as a critical mass of Green’s existing customers have beliefs and a demand function like the gray one above, Green will lose business to Blue and be forced to shutter their doors. In this case, hinging on the critical mass of disagreement, the free market at work will reduce business for Green until the day they no longer breakeven.

We see a similar story in the allocation of venture capital. Plenty of research has shown that women executives and female CEOs outperform the indexes of male dominated companies. Women are managing to be a better bet than men by as much as a factor of three, and yet they only make up about 6.5% of Fortune 500 CEOs and only 20% of VC deals, or 2% of all venture capital. They drive additional value, outgrowing their male counterparts by 63% in the case of First Round Capital. In other words, women founders cost VCs less, earn them more, and yet, they still don’t receive equal funding. This is a lot like our bakers Blue and Green. Blue is the VC funds putting capital towards women founders and seeing results. Green is the funds that follow the industry standards and miss out on the returns of investing in female founders. Angels and venture capitalists are suffering a huge opportunity cost in not servicing the demands of female founders.

Various reports of discrimination in the community help to explain some of this. In some benevolent cases, discrimination occurs as an accident, as Katrina Lake outlines in conversation with NPR, pointing out that many VCs have pitch requirements that could exclude the growing industry of so-called mompreneurs. The offices are highly male dominated, with only 6% of VCs being women as recently as 2016.

Compare these averages to the Rockies Venture Club. Of our 31 portfolio companies, over half star female founders running companies ranging from tech solutions for kitchens to FinTech answers for any early stage startup. Enter RVC’s Women’s Investor Network, or WIN for short. Headed up by Director Barbara Bauer, WIN was founded to increase the number of active female Angel’s working with RVC. Something Barbara has identified, and highlights regularly at RVC events and talks, is the need to fund female entrepreneurs to make sure that women have the capital and the experience to be informed Angels. As an experienced entrepreneur with a background and education in science and engineering, Barbara represents the best of the best to lead RVC and the venture and Angel communities as a whole towards a better, more diverse future.

Know someone interested in working with Barbara as a WINtern? Have them send a resume to info@rockiesventureclub.org!

Most interns don’t expect to learn from the Executive Director or their CEO. Fewer get to. Fewer yet get to sit through a five hour seminar on financial strategy with said executive. This is what the analysts at RVC got on Tuesday as Executive Director Peter Adams walked a group of entrepreneurs and investors through a CFO’s role in acquiring funding. From how to build adequate proformas to when to schedule your raises, the RVC Financial Class Cluster threw us into the fire of financial strategy. Sitting in with a group of investors and entrepreneurs alike, here’s a look at what we covered.

Financial Strategy

Diligence is the name of the game at RVC, with every prospective deal getting a full diligence report drafted up for RVC members. For Peter, this means believability and accuracy in the numbers. In the case of financial strategy, this means clearly defining your major milestones, your key hires, when (roughly) you’re going to raise capital, how you’re going to raise it, and the nitty gritty of each of those things. Peter’s philosophy outlines all of these alongside clear exit modeling as fundamental to a success for prospective founders. What stood out in this densely packed granola bar of venture capital knowledge? The paradox of uncertainty.

Peter made clear that a company and its founders won’t have a clear date on which they will need to raise the next round, hire that new sales star, or sit down with their dream acquirer. Peter also made clear that a company needs to have an idea of what those events look like, and while precision is not present, they key came down to milestones. Bringing on new team members shortly after key product launches, identifying the scalability inflection point, and raising enough money to pave a long enough runway are his tips for a successful financial plan.

Valuations

Part of diligence is accuracy and reasonable goals, which for valuations means a lot things. One of Peter’s highlights is that while Angels would absolutely love it if their firms all became unicorns, unless that conversion happens in a fairly tight window, doing so isn’t best for the Angel. Rather than lofty goals that may provide a bigger sum after a decade, Peter instead argues for reasonable exit strategies. Acquisition by key distributors or large firms with histories of choosing the buy side of the buy-or-build dilemma, Peter argues, can result in faster turnarounds and safer strategies for both Angels and entrepreneurs.He defines clear ranges with key milestones for reasonable early valuations, and outlined a number of models used at RVC to determine those early valuations.

Peter also faced the audience with a thought challenge. Imagine an entrepreneur trying to raise their first seed round. As the omnipotent spectator, we know this company to have a specific valuation. The question at hand? Is it better for the entrepreneur if the company gets valued at double that valuation, or 10% less than its true value? While the company would be able to raise more money at the double valuation, the answer would be the 10% reduction. Less dilution and a slower, more controlled value inflation would prove advantageous for the entrepreneur.

Proformas

Proformas are integral to the other parts of this class. They are the bridge between your vision as an entrepreneur and the funding to get you there. It is the blueprint of your business and your plans, the pictogram by which you assemble a successful company. This means years of financials, forecasts, milestones and targets, key hires, and more. Good proformas are believable proformas, argues Peter, utilizing reasonable projections and honest numbers to justify their claims and valuation. He argues that VCs and Angels alike would rather see that entrepreneurs have reasonable expectations and goals they know they can reach. In other words, be honest. If your burn is running $15k a month, don’t try to hide it. Instead, highlight where that burn is resulting in growth and is driving value. Show how you can scale back to balance if you need to slow down while seeking funding. Tell prospective investors honestly whether or not you have plans for future rounds. What milestones lead up to it? There are no ruby red slippers to take you back to the quiet farm in Kansas, so build the yellow brick road that takes you to Emerald City of successful exit, no matter how treacherous it may be.

In a panel on angel return data at the Angel Capital Association Summit recently the speaker went back and forth between data using ROI (multiples of the original investment) and IRR (internal rate of return).  These metrics are very different and it is important for angels to have a good understanding of how using each of these will impact their investment strategy – in many cases for the worse!

Why Hunting for Unicorns May not be a Good Strategy for Angel Investors

Angel Investing Unicorn

 

There is a mythology among angel investors about going for “unicorns” (private companies with a valuation of $1 billion or more) in their portfolios.  In many cases, real returns from unicorns may be less than hitting solid singles and doubles that exit at under $100 million. Here’s why:

 

While unicorns may appear to give great returns, our speaker gave an example.  He had invested in DocuSign which is now readying itself for an IPO.  (Initial Public Offering)  After multiple follow-on rounds after his angel investment, his percentage ownership had been significantly diluted, but even worse – it took twelve years for DocuSign to get to exit from the time of his investment.  While he expects to receive an investment ROI multiple of 4.8 times his original investment, that comes out to only a 15.3% IRR. Getting $480,000 back on a $100,000 investment sounds good initially. When the amount of time that the investment takes comes into the calculation, the unicorn doesn’t look as good as some of the same investor’s exits that came along in five or fewer years and yielded $100 million or less.  In fact, his average IRR over his portfolio was 27%, so this unicorn was bringing his average down!

 

Angel Investors should think about their investments from a portfolio strategy viewpoint.  

Smart angels will target 10X their investment back within five years or less – that’s a 58.5% IRR.  After calculating winners and losers over time, angels who invest through angel groups will typically see a portfolio return in the 23-37% range, or about 2.5X.  Getting 4.8X your money back sounds good, until you think about what you could have done with that money if you could have reinvested it after five years.  

 

What if the investor had taken his $100,000 and NOT invested in DocuSign, but rather invested in ten deals at $10,000 each with half of them returning nothing and the returns from the others averaging 2.5X return over five years?  And what if he had reinvested the returns from those investments? At that rate, including winners and losers, he would have received $850,000 at the end of twelve years for an 8.5X return or 27% IRR. Clearly, taking time into account, but also taking the opportunity to recycle exits into the next deal increases profits.  

 

The likelihood of any one investment being a unicorn is something like 1,800 to 1, but the most prolific angel investors I know have portfolios of maybe 100-150 deals.  On the other hand, getting a 2.5X in five years on a ten company portfolio is fairly common among angels. Unicorn hunting, even when successful returned almost half the cash that the diversified angel did.  Using IRR instead of ROI helps angels to understand the best way to think of their strategy.

How do Venture Capitalists Differ from Angels?

Venture Capital funds often talk about how they need to go for the big multiples “because they need to return large amounts to their Limited Partners.”  This is partly true, but not for the reasons they would have you think. Angels have the same return targets as VCs, and, when they invest in groups, they tend to outperform Venture Capital funds by a good margin.  Over the past fifteen years VCs have been hunting for unicorns and missing out on the singles,doubles and triples that angels enjoy, but their returns averaged 9.98% – less than half of what angels have earned during the same period.

 

VCs are limited by time in their investments.  The average VC fund lasts for ten years, and many funds have a policy of not “recycling” their returns into new investments, so they are motivated to get large multiples of ROI rather than focusing on quick returns with high IRR.  It’s better if a fund can recycle its returns into new investments, with the caveat that they must return all capital to Limited Partners within ten years.

 

VCs also shy from using IRR to measure their fund’s performance because of the “J Curve” which refers to the shorter period between investment and failure compared to the longer period between investment and large-multiple success.  Using IRR can make the fund’s performance look sub-par early in the fund’s lifecycle.

 

Finally, the institutional investors that are the VC’s Limited Partners often earmark their funds for long investment periods and the last thing they want is to get a 30% IRR on an investment that comes back in the first year.  They would rather deploy the capital for longer periods for larger returns. Because institutional investors have a high cost of analyzing investment opportunities, it’s not as easy for them to re-deploy as it might be for angels.

 

So, angel investors differ from VCs in investment strategy, and if they invest in groups and pay attention to using IRR as their performance metric, they can outperform VCs and create significant returns for their own portfolios.

If you’ve read ANYTHING about cryptocurrencies and ICOs (Initial Coin/Token Offerings), you’ve read opinions from people who believe that the value of these coins will go up 100 times and others who believe that they will all crash to zero because there is “nothing there”.  If you believe either of these groups, you’ll be in big trouble if you’re an entrepreneur or angel/venture capital investor in this space.  Some cryptocurrencies will indeed go to zero and others will likely rise by 100X, but out of thousands of deals, how would you know how to pick the right ones?

It’s not just cryptocurrencies that have a lot of uncertainty today.  We’re seeing unprecedented change in blockchain, artificial intelligence, Internet of Things, self-driving cars and more.  These trends are all going to become a big part of our future, but which companies are the ones we should invest in?

Experience can be a guide in helping decipher the trends in fast breaking industries. The cryptocurrency ICO market reminds me a lot of all the dot.com startups in the 1990’s who were going public without having much more than a URL like etoys.com, socks.com, pets.com, etc.

What happened during the .com boom?  Lots of companies got funded quickly and at valuations that didn’t make sense.  It kind of looks like the ICO boom now.  When companies get too much money too quickly, they tend to accelerate their failure rate because they haven’t figured out their product-market-fit or how to scale up quickly.  We’ll certainly see some of that in the current ICO boom, but, just like in the .com boom, we’ll also see some VERY BIG winners. Google and Amazon looked crazy in the 1990’s  but now they are today’s biggest companies.  We will see the same thing with blockchain, cryptocurrencies, AI, IoT, intelligent cars and more.

The people who predict wholesale failure or wholesale success are bound to be wrong.  The people who are diligent in digging into who the winners and losers will be with a futurist attitude will succeed.  Investors who think like the hockey player Wayne Gretzky who famously said “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” 

Great venture capital investors have to be like great hockey players and invest where the market is going to be.

Predicting the future is hard, but we’ve got some help for you.  The upcoming Angel Capital Summit, produced by the Rockies Venture Club will be focusing on Funding the Next Wave of Innovation.  We’ll be interviewing CEOs of companies that have gone through major trends in social networks, cyber security and more in order to learn how to identify and ride the trends.

The Angel Capital Summit will also feature 16+ companies that are riding the trends of their industries, pitching to angel and venture capital investors.  The event is open to the public and is free for RVC Keystone and Active Investor Members.  (If you’re not a member yet, click HERE for more information).

The Rockies Venture Club is the oldest angel investing group in the U.S. and is a non-profit organization focusing on furthering economic development by educating and connecting angel investors and great startups.