The End of the Rainbow: Bootstrapping a Business to Gold

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Fundraising for start-ups is a popular topic these days. There is a lot of glory in receiving big money from investors. After all, there must be promise in your company if Angels or VCs are willing to invest.

Have you ever tried to reach the pot of gold at the end of a rainbow? Literally. Like, have you ever seen a rainbow and tried to walk or drive to the end of it? It’s impossible. The end of the rainbow is elusive. And its location fluctuates and often disappears altogether. This is a fantastic metaphor for fundraising.

An entrepreneur is sometimes more likely to  grow a company by financing it themselves and working hard to build their business from the ground up. What’s more, the bootstrapping entrepreneur will gain better control over the future decisions–something that may disappear with big investors on board.

Sure, some start-ups do gain a bit of notoriety when they become venture-backed, but at what price? If someone is going to give you loads of money, they don’t do so without expecting a lot in return. Fundraising is “really like celebrating someone going into debt. Even equity investors expect a payback.” Does a business founder really want to owe everything to backers?  If you have a strong notion of how you want to build your company, it can pay to make your way independently.

So what exactly does bootstrapping a business involve? Bootstrapping in business means building a start-up by using internal cash flow (as opposed to money from family, friends, or investors) and little to no external help.  This method of growth is undeniably slower than big investments up front, but the time and effort can pay off. As “angel investor and wine entrepreneur Gary Vaynerchuk has said, ‘My dad taught me that when you borrow money it’s the worst day of your life.’” The bootstrapper can obtain financial independence and pursue the mission of her start-up unabated if she is willing to go the distance. Nobody will be knocking on her door looking for a return on investment except herself.

What are some ways bootstrappers can keep the company afloat in this entrepreneurial journey? After all, it’s not easy by any means, and there will be perils around many a corner. Startups can grow by reinvesting profits in their own growth if bootstrapping costs are low and return on investment is high. The entrepreneur can also continue working otherwise to fund the new venture. Or the business model might require customer financing – asking for payment up front before the service or product is delivered. And of course, there are an unlimited amount of other creative solutions for bootstrapping, ones to be determined most useful on a per-company basis.

What are some examples of successful bootstrapping? You might see somebody with experience in start-ups creating a new business. Nick Denton is a good example –after leaving his first company, First Tuesday, this guy worked out of an inexpensive storefront to build Gawker, a company now valued at $150 million.  On the other end, you have Sophia Amoruso who worked inconsequential odd jobs until she earned profitability and $30 million in annual sales with her clothing start-up, Nasty Gal. She bootstrapped her way to success in five years of sales on Ebay.

All of this bootstrapping talk isn’t meant so much as a deterrent to fundraising as it is used to suggest an alternative method for more securely and independently building your business instead. Nobody can deny the allure of that pot of gold at the end of the entrepreneurial rainbow. I mean, who would say she doesn’t want her idea or product to hit it big in all senses of that phrase? It’s just that very few ventures will actually end that way so easily and without consequence. If you want control, financially and structurally, of your company, it just might be better to spend the time buying a pot, finding gold bit by bit to fill it, and then painting the rainbow yourself.

 

Stacy Gregg is an educator, runner, reader, and mom to two energetic pre-schoolers. She joined the Rockies Venture Club at the end of 2012 to support the communications side of the organization.

Venture Capital Bloggers: Who's who in the top 5 states

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From time to time a new ranking of the VC must-read blogs appears on the internet. During the research for this post I went through many of them, some based on the number of unique visits some others on the author´s quality scale or personal preferences. As it turns out, the first fifteen positions are always taken by the same guys.

In a world where internet has taken over and leadership claims to be global, it occurred to me to check the relationship between an active and prolific VC community (based on # of deals and $ invested) and the existence of VC thought leaders in that community.

California, Massachusetts, New York, Washington and Texas ranked in the top five positions in terms of venture capital invested based on the 2012 figures provided by the National Venture Capital Association (Colorado was 6th. Yay!). Let’s see who are the most relevant venture capital bloggers in these communities and what are they saying.

 

For the purposes of this post a state is considered a Community and blogger is a thought leader. In the VC world, bloggers aren’t just opinionated, they are professionals with years of experience.

1. California:

Eureka! We have found it, the world champion in Venture Capital based on number of deals and amount invested. Thus it doesn’t come as a surprise that it is also the winner for the number of relevant bloggers!

Area: Menlo Park / Silicon Valley

Firm: August Capital

Blog: Venture Blog.

Area: Los Angeles

Firm: GRP Partners

Blog: Bothsidesofthetable

  • Paul Graham: Co-founder of the Y combinator and for many the “king” of bloggers. In his minimalist looking website you can find gripping essays (no blogposts) that won´t leave you indifferent, just check his last one on how to get startup ideas.
Area: Mountain View

Firm: Y Combinator

Blog: PaulGraham

  • Chris Dixon: Entrepreneur and investor with a moderate style. Dixon is considered a “greater explainer of trends” and so he does in hardware startups.
Area: Menlo Park / Silicon Valley

Firm: Andreessen Horowitz.

Blog: CDixon

  • Ben Horowitz:  self declared a rap fanatic, Horowitz uses rap lyrics as prefaces of his blogs and doesn´t have a problem disclosing numbers and strategies. Check his last post on how to hire sales people.
Area: Menlo Park / Silicon Valley

Firm: Andreessen Horowitz

Blog: ben´s blog

The list doesn´t finish here it goes on and on with other brilliant bloggers such as Bill Gurley or Dave Mcclure. So it seems the most VC active state has the most active and relevant bloggers.

 

2. Massachusetts:

Meanwhile on the opposite coast, Massachusetts emerges as the second VC power.

  • Rob Go, Lee Howe, David Beisel. These three VCs are the cofounders of Next View Ventures, but apart from sharing their company they also share a passion for blogging each one of them with a different style and point of view.
Area: Boston

Firm: Next View Ventures

Blog:  Rob Go, Lee Howe, David Beisel

Area: Boston

Firm: Volition Capital

Blog:  Thinking about Thinking.

 

3. New York:

With New York City as largest, richest and most influential regional economy in the United States, and Manhattan as the home to six major stock markets, venture capital is rapidly growing in this region.

  • Fred Wilson: The raising voice for the New York Tech Scene. Famous for his blog section MBA Mondays  with around 160 posts in MBA topics such as revenue models-gaming. His blog constitutes an enormous body of work and knowledge worth a deep dive in.
Area: New York

Firm: Union Square Ventures

Blog: AVC

Area: New York

Firm: Brooklyn Ventures

Blog: Thisisgoingtobebig.com

 

4. Washington State

Nobody stood up in the Seattle community until the 7th of October of last year, when the VC Greg Gottesman wrote his first blogpost.

  • Greg Gottesman:. The VC mixes personal opinions and experiences with business tips and life style advices in a looking promising blog.
Area: Seattle

Firm: Madrona

Blog: starkRavingVC.

 

5.Texas

“The exception that proves the rule?” With a GDP bigger than The Netherlands or South Korea Texas ranks the 15th economy in the world and the 5th state in VC investment… And there is nobody taking the lead out there in the bloggosphere… The more I think about the whys of this, the more my fingertips tingle for a new blogpost.

If you are reading this and you know of someone please let us know we will be happy to include a Texan blogger!

 

6. Colorado:

Yup! I know It´s out of the top 5 but…

  • Brad Feld: In a mix between personal and professional thoughts Brad Feld has gained the respect of the VC and entrepreneur community not only in Colorado but also worldwide. Prolific, eclectic and sometimes controversial FeldThoughts is full of articles worth your time. Check out his last post on Software patents.
Area: Boulder

Firm: Foundry Group

Blog: Feld Thoughts

 

In a nutshell, in California, Massachusetts, New York and Colorado  the equation seems to work and a high levels of investment are accompanied by well-know blog leaders spreading the word out. On the contrary, Texas and Washington don’t follow the pattern! Yes, on the internet area leadership is global, but to certain extent VC investments and communities are still local and so they are their know-how and customs. Texan and Washingtonian bloggers or bloggers-to-be raise your voice! We avid readers, entrepreneurs, innovators, angels and investors want to know and are waiting for you!

 

About the Author: Sara Rodriguez is the new Associate Director of the Rockies Venture Club. Please consider welcoming her and introducing yourself when you see her at RVC events. 

 

 

NexGen Storage Acquired For $119 Million – From the VC's Perspective

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Article by Tim Harvey, regular contributor to Rockies Venture Club Blog

This week, Fusion-io acquired Louisville, CO based NexGen Storage for $119 million. The next day, I had a chance to sit down with venture capitalist Kirk Holland of Access Venture Partners, who was also on NexGen’s board. Access Venture Partners co-led the $2 million series A round with Grotech Ventures, and Next World Capital later led the $10 million series B.

NexGen founders John Spiers and Kelly Long have been around the venture capital circuit before – they were co-founders of Boulder-based data storage company LeftHand Networks, which sold to Hewlett-Packard in 2008 for $360 million. A few years later, they again had a vision for a better data storage technology and started from scratch. This time around, solid-state disk drives and cloud infrastructure were ever more important, and they developed their product from the beginning with these ideas in mind, building it to intrinsically protect their competitive advantage. John and Kelly bootstrapped NexGen to get started in 2010, and reached out to Kirk regarding venture funding after about 6 months. Due diligence meetings, which went on for a few months, were held in Kelly’s basement where they first hatched the idea of NexGen – and a few short years later the $12 million in capital turned into an acquisition nearly 10X that amount. The exit was faster than expected, but they thought the terms were great and they were excited to work with Fusion-io.

Kirk’s previous firm, Vista Ventures in Boulder, began investing in LeftHand in 2001 so he had the chance to get to know John and Kelly over many years. He was impressed with the team more than 10 years ago, so in this deal he said “working with John and Kelly took the team risk off the table.” Given this strong relationship and the fact that LeftHand had one of the biggest VC exits Colorado has seen, they were ready to do it again. “The industry was pretty crowded when we made the investment,” Kirk said, with both venture-backed and big name tech companies all trying to do the next big thing in data storage. He thought NexGen’s technology could leapfrog the other products, and the experts Access Venture Partners brought in for due diligence confirmed that. “They were really passionate about building a great, sustainable business. NexGen reinforced the idea of working with trusted relationships,” Kirk said.

Access Venture Partners is a big name in the Colorado venture capital landscape. This is the second fund they’ve closed, and the MD’s there have invested over $100 million in more than 50 technology startups so far. These companies as a group have gone on to raise over $1.1 billion in additional capital, growing revenue 15X since initial investment, and creating over 3500 high paying jobs in Colorado. AVP currently has 20 companies in their active portfolio, with 19 successful exits. Their focus is on high-margin technology businesses in large or rapidly growing markets, especially in data security/storage, cloud computing, and digital media/consumer internet businesses. They lead the vast majority of fundraising rounds they participate in, and while sometimes that means writing the largest check, they also lead by investing first and getting other VC firms on board. They also like to work closely with entrepreneurs after the investment is made, often taking a board seat and using their connections to help place key executive talent, as they did with NexGen.

Kirk is a heavy hitter in the area as well, after moving to Colorado from the Bay Area. In addition to the nearly $500 million in exits he’s been involved with through LeftHand and NexGen, he led the Series B round for Rally Software, which raised $84 million in an IPO in April 2013. He was also an investor/board member for MX Logic, an Englewood, CO SaaS company that sold to McAfee in 2009 for $140 million. He’s been a TechStars mentor from the start, with Access VP also supporting and investing there early on. His focus within AVP is on cloud technologies and SaaS/consumer internet companies, and although he likes to leverage existing relationships, he also explores as many other startups as he can. “You have to keep looking under rocks and be open to the next generation,” he says. He believes in entrepreneurs who are passionate about building a great company, not looking for a quick buck. “It’s a red flag when I think someone is only in it for the money,” he says. Nonetheless, many of these companies have gone on to create substantial value here. “We’re really most happy for the founders and the (NexGen) team’s success. We’re here to support the entrepreneurs, but they’re really the ones that drive it.”

Big exits, especially in the 9-figure range like NexGen, are going to really help put Colorado on the VC map. While Boulder may be famous from investors like Brad Feld and TechStars, Kirk believes there is a shortage of early-stage capital in the area. “Early-stage investment has dropped in Colorado over the last 5-10 years as VC’s didn’t raise follow-on funds, while the number of young companies has grown”, he says. Venture capital isn’t limited to state lines, but it’s certainly helpful to have investors nearby. Fusion-io actually has offices just miles from NexGen, so this acquisition was sort of in their backyard as well. The universities in the area (CU, DU, CSU, Mines) attract technology and engineering talent, and many of the students that come to Colorado don’t want to leave after graduation. That’s what happened to me, and even though skiing might’ve been my excuse to move here when I was 18, it’s the people and the startup community (and the weather) that have keep me here. These schools also have close connections to the startup community, through groups like CU’s Deming Center for Entrepreneurship, and Colorado School of Mines’ Technology Transfer program to help students commercialize their inventions. Big players like Google, Microsoft, and Oracle are also importing talent by adding to their already-large ranks in Colorado. “The people here are very motivated and passionate about what they do,” Kirk says, “without the focus on a quick buck that leads to higher employee turnover rates” that concerned him with some companies he saw in the Bay Area. Colorado is also a less expensive place to build a business than anywhere in the big coastal cities, and still has solid venture capital groups like VCIRRockies Venture Club, as well as the sweetheart of Boulder, TechStars.

Although April was a great month for Colorado VC-backed firms, we have to keep innovating and building great companies to strengthen the region. More investment capital will certainly help – but it’s the people here that drive entrepreneurial success.

Article by Tim Harvey, regular contributor to Rockies Venture Club Blog

VCs who Blog

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If you really want to understand venture capital. Read venture capitalists’ blogs. Here is the most complete venture capitalist blogroll I’ve ever seen. Shamelessly stolen from National Venture Capital Association amazingly informative website.

 

VC Firm Name of VC Blog Name
Andreesen Horowitz Marc Andreesen pMARCA
Atlas Ventures Fred Destin Fred Destin’s Blog
Atlas Ventures Max Niederhofer Max Niederhofer
August Capital David Hornick VentureBlog
Ballast Point Ventures Navigating Venture
Battery Ventures The Whole Stack
Benchmark Capital Bill Gurley Above The Crowd
Bessemer Venture Partners David Cowen Who Has Time For This?
Bessemer Venture Partners Sarah Tavel Adventurista
BOLDStart Ventures Ed Sim BeyondVC
Canaan Partners Alok Mittal VentureWoods
Canaan Partners Izhar Shay’s StartupStadium
CommonAngels Chris Sheehan Early Stage Adventures
DFJ Esprit Nic Brisbourne The Equity Kicker
DFJ Portage Venture Partners Matt McCall VC Confidential
Draper Fisher Jurvetson Tim Draper The Riskmaster
Edison Ventures Edison Community Blog
Finaventures Rachid Sefrioui Rachid Sefrioui on Venture Capital
First Round Capital Josh Kopelman Red Eye VC
Flybridge Capital Partner Jeff Bussgang Seeing Both Sides
Flybridge Capital Partners David Aronoff Diary of A Geek VC
Flybridge Capital Partners Michael Greeley On The Flying Bridge
Flybridge Capital Partners Chip Hazard Hazard Lights
Flybridge Capital Partners Jon Karlen Venturing Forth
Flybridge Capital Partners Matthew Witheiler Bits of Cents
Foundry Group Jason Mendelson Mendelson’s Musings
Foundry Group Brad Feld Feld Thoughts
Foundry Group Ryan McIntyre McInBlog
Foundry Group Seth Levine VCAdventure
GGV Capital Jeff Richards, Partner 13 Hours to Think
GGV Capital Glenn Solomon, Partner Where Sand Hill Road Meets Wall Street
Grotech Ventures Don Rainey VC in DC
Highland Capital Partners Alex Taussig ataussig.com
Highland Capital Partners Bijan Salehizadeh TheBij.com
Highway Ventures Highway 12 Ventures Group Blog
Hummer Winblad Will Price Process & Iteration
Institutional Venture Partners (IVP) Jules Maltz better late than never
Intel Capital Christine Herron Christine.net
JumpStart Inc. JumpStart Blog
Levensohn Venture Partners Pascal Levensohn Pascal’s View
Lightspeed Venture Partners Lightspeed Venture Partners’ Blog
Matrix Partners David Skok For Entrepreneurs
Matrix Partners Antonio Rodriguez The Onda
Mayfield Fund Allen Morgan allensblog
Mohr Davidow Ventures David Feinleib vcdave
New Atlantic Ventures New Atlantic Ventures Blog
New Enterprise Associates NEA Blog
Okapi Ventures Mark Averitt OC VC
Point Judith Capital Lee Hower AgileVC
Polaris Venture Partners Ryan Spoon RyanSpoon.com
Polaris Venture Partners Mike Hirshland VC Mike’s Blog
Safeguard Scientifics Safeguard Scientifics’ Blog
Scale Venture Partners Rory O’Driscoll VC Matters
Trident Capital Evangelos Simoudis Trident Capital Blog
Union Square Ventures Fred Wilson AVC
Venrock David Beisel GenuineVC
Volition Capital Larry Cheng Thinking About Thinking

 

A Culture of Innovation in Technology Brewing in Colorado

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Guest post from Michael Price posted from www.connectedwest.org 

Email: michaelprice@connectedwest.org or call 720-515-7581

By Michael Price, Executive Director of the Coalition for a Connected West

Something pretty special has been brewing in Colorado recently.  It’s no secret that Boulder has become the next tech diamond in the rough—landing the top spot as a hot hub for new tech startups, other tech talent and private investment.  At Coalition for a Connected West, we sense a refreshed and serious commitment by Colorado’s lawmakers to work with the Coloradans to ensure the right regulations are in place to support expanding connectivity and flourishing innovation and private investment.  That’s why we took the opportunity to bring thought leaders, techies, and lawmakers together at the state Capitol to talk about hot legislative issues and business needs to create a more business- and tech- friendly environment in Colorado.

Last week, the Coalition for a Connected West joined the Colorado Technology Association (CTA) and Built In Denver to host “A Day at the Capitol.”  It was an opportunity to celebrate Colorado’s culture of innovation and establish a direct dialogue between policymakers and the technology community.  Nearly 200 tech leaders attended the event, which included some of Colorado’s top thought leaders in technology, all dedicated to creating connected and thriving business and tech communities in the state.

 

[Watch the  YOUTUBE VIDEO of CTA Day at the Capital Event]

Erik Mitisek, the newly announced CEO of the Colorado Technology Association and member of CCW’s advisory board, set the tone:

“Technology is the center-pivot that really is going to fuel innovation, efficiency and allow our state to be competitive in ways that we haven’t even thought of yet.”

On behalf of our partners, I moderated “Innovation and Growing Technology Companies,” a panel discussion featuring Colorado’s leading entrepreneurs and Wyoming State Senator Cale Case.  The engaging panel included Peter Hudson, CEO of iTriage; Tom Higley, CEO of Vokl; Brian Pontarelli, CEO of Inversoft; and Will McCollum, Denver General City Manager at Uber , who discussed the ingredients that lead to growth in the technology industry.

Photo credit: Inversoft
(Left to Right) Peter Hudson, CEO of iTriage; Michael Price, Executive Director of CCW; Tom Higley, CEO of Vokl; Brian Pontarelli, CEO of Inversoft; WY Sen. Cale Case; Will McCollum, Denver General City Manager at Uber.

The general consensus was that innovation needs space to thrive without burdensome regulations that could slow it down.  We also emphasized the need for Coloradans to be more involved in the policymaking process.  CCW is about generating a dialogue between the IT community and the policymakers that affect our lives and businesses.

Andrew Romanoff, former speaker of the Colorado House of Representatives, gave a presentation on how the legislative process works:

“I’m glad that you are taking the time to lift the lid on the Golden Dome and see what goes on underneath because I think it’s the only way, the best way to make this process as responsive and accountable and transparent as possible.”

During the event, the Colorado General Assembly was in the midst of the final days of the Legislative Session. Several important measures that would impact the technology community were being considered, including HB 13-1255.  The bill, authored by state Rep. Angela Williams, would create an environment conducive to encouraging investment in IP-based communications networks.  These next-generation networks are necessary to support the data-heavy traffic generated by devices like smartphones and tablets that have become central to our lives and our economy.  Similar legislation passed in Wyoming, which Sen. Case brought up during the panel discussion as a way that states with rural communities like Wyoming and Colorado could use to send a signal that they are open for tech business.

While the legislation passed unanimously in the State House (62-0), it is currently pending in the State Senate.  CCW and CTA are calling on Coloradans and members of the tech community to reach out to their senators and ask them to support the legislation.

Click here to take action!

CCW would like to thank CTA and Built In Denver for working with us to create a better future for Colorado and hosting a great event!

 

Investor Pitch Deck Series #5 – The Problem Slide

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Dear reader,

This is the fifth of many blogposts in a series that I’m calling the Investor Pitch Deck Series. I am creating a post about each investor pitch slide, why it is important, the common errors, and how to communicate that you have what it takes to achieve your goals for this company.

Posts in this series

(note, this is NOT a suggested order for sides in your deck)

 


The mantra for this series is, “Above all, make sense.”


 

The Problem Slide

You can convey more information in the discussion of the problem than with any other single topic in your deck. Your company, and presumably your game-changing technology, product, or service was created to solve a pain point for someone. In your discussion of the problem, investors will be listening for hints that this problem is worth solving, that someone is willing to pay to have it solved, and that there are enough of those people out there to support a viable business.

Interestingly, your goal here isn’t to talk about the problem in detail.

If you have years of data that suggest nurses spend an alarming amount of time filling out paperwork and not enough time treating patients, then say so with a single graph. Then, move on to tell your audience how much time and money it costs one hospital, or a conglomerate of hospitals, or the whole nation each year for nurses to get their paperwork done. These staggering numbers will support the notion that you are dealing with a potentially ginormous problem.

The fundamental point of your problem slide is to illustrate that you are able to solve a huge problem that will be supported by customers with the money to pay for your solution.

 


Cringe Factors

Cringe Factor #1 –  You go into detail on the limits of the current technology.

Why this makes us cringe: This would be appropriate in an industry specific talk where everyone in the room can follow the oh-so obvious problems associated with the use of a reversed biased p+-n junction. But in mixed company, you must speak plainly or you risk losing important people.

How to do it right: Stick with an eight grade understanding of your industry technology when speaking to a mixed audience. Think PBS special. Even though you might be surrounded by very smart people with PhDs, MBAs, and MDs, they probably have not kept up with the fundamentals of your specific industry and will be a little overwhelmed with an in depth tech talk. Further, the point of your investor pitch is not to discuss the technology, but to discuss the deal. Remember, everything you talk about in an investor pitch comes back to money.

 

Cringe Factor #2 – The problem is oddly specific

Why this makes us cringe: If you solve a pain point for for a very small group of people, then your business seems limited from the start.

How to do it right: If your technology helps a small group of people (women over 6’4″ tall who drive small cars), then you will have to show that your company is actually a platform for future technologies that all add up to a large target market. The Problem is a fundamental basis for your business plan, but a small initial market doesn’t have to sink your company. It’s the messaging that is important. When the long limbed ladies represent an initial market and the rest of all American car divers represent your larger target market, you will be fine.

 

Cringe Factor #3 – Your technology is in search of a problem

Why this makes us cringe: This is a notoriously common problem with products that come out of universities. The research is so cutting-edge that the technology created actually precedes the need for itself. If you invent a hammer, but the world has not yet invented nails, you will have some trouble selling that hammer.

How to do it right: Most technologies can have alternate uses. You will have to identify a marketable use for your technology (or a subset of your technology). Look for big markets with a lot of money involved. You will absolutely have to call people or meet with the folks experiencing the pain point before you can claim that your technology will help them. Really understand the problem before you go forward with developing the technology into a product.

 

Cringe Factor #4 – The problem is big, but poorly supported by capital.

Why this makes us cringe: There are very large problems in this world that are not well funded. Clean water is a big one. Poverty, child abuse, malnutrition, etc. Unfortunately, the biggest problems in this world do not have payers attached to them.

How to do it right: You must show that someone is wiling to pay for the solution that you put forth. If your company cannot show that someone will pay for the product or service you provide, then you cannot claim to be able to return money back to the investors. Instead of investors, you should seek grants and philanthropists. Problems with a significant social impact do not have to be poorly funded. If you are creative, you can find a way to many many problems lucrative enough to pursue.

 


 

The problem slide should most likely be broken into two or three slides that handle the three sides of the problem. The slide to the right helps us understand the fundamental safety importance of identification in a hospital setting.

  • Outline the problem so the audience gets it
  • Show data supporting the size, extent, or number of people affected by the problem
  • List a few financial figures suggesting the potential return on investment for the customer to stop doing things the old way and switch to your product.

 

 

Article by Nicole Gravagna, PhD, Director of Operations for the Rockies Venture Club as part of a series on the elements of an investor pitch deck. The next in the series is the Customer ROI Slide.

 

The Very Basics of Anti-dilution in Early Stage Financing

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First Post by Sara Rodriguez-Lopez

For those (many) who don’t know me, I moved a few months ago to Denver where I began to volunteer at the Rockies Venture Club. After only 3 months I met a lot of interesting people and learned about so many different things that my head was ready to explode!

I earned my Master’s in entrepreneurship and I did start my own company in the past, but it was at RVC where I got to see, for the first time, how Angel investors work. Eventually, I thought “Ok, I got it! I’m starting to see the big picture” until Nicole Gravagna invited me to Pat Linden’s Anti-dilution class!

Anti-dilution, now that’s tricky stuff!

A couple of days before the class I started reading about anti-dilution… oh boy!!! Full ratchet, narrow weighted average, broad weighted average, pay to play…This stuff really made my head spin…  At the end, I think I ended up having a “more or less” clear picture about the anti-dilution provisions… So, here I am writing down what I learned (just the basics… very basic) and hoping this blog-post would help someone out!

 

What is dilution?

Dilution is the subsequent sale of shares of stock at a price per share less than that paid by the preceding investor. Therefore, to protect their rights investors usually include an anti-dilution clause in the term-sheet.

If you are an investor you may be wondering now: why when the shares are sold at a higher price it’s not considered dilution if my ownership percentage will be reduced?  Because, although it is true your ownership is being diluted, the increment on the share price implies that the valuation of the company went up. As a result, the overall value of your investment increased and you should be happy. Cool! First thing clear!

 

What mechanisms can be put in place to avoid investment dilution?

There are two main formulas:

A. Weighted Average Formula: is the most common approach to anti-dilution protection and calculates the price considering the price and the amount of money previously raised as well as the price and amount of money being raised in the subsequent dilutive financing.

There are two primary variations of this formula that are basically differentiated by what constitutes “issued and outstanding common stock”

a.1) Broad based: the term “issued and outstanding common stock” includes all shares of stock outstanding, common and future stocks.

  • For Founders: This is the anti-dilution clause more “company friendly” and also the most customizable one, many investors will agree upon this formula.

a.2) Narrow based: the term issued and outstanding common stock” includes only the common stock issuable upon conversion.

  • For Investors: Narrow based is the most beneficial for you since this formula provides a higher conversion rate than the broad based.

B. Full Ratchet: “when the conversion price of the preferred stock outstanding prior to such financing is reduced to a price equal to the price per share paid in such a dilutive financing” or in other words: if you bought a share per $1 and the new price is $0.5 the conversion rate is two. For each of the “old” shares you get two of the “new ones”. Under this formula it doesn’t matter if the company raises $20,000 or $200,000,000

  • For Founders: awful, no matter how you look at it you don’t want to be here (it seriously jeopardizes your ability to raise money from new investors).
  • For Investors: it is a great deal and the most protective clause you can get, but be careful in this way you can lock down the company to future investors.

 

Is there something the company can do to mitigate the cons of an anti-dilution provision?

One of the most common clauses that companies usually include in the term sheet in order to protect their rights is the “Pay To Play”  clause that provides anti-dilution protection only for investors who will participate in the next dilutive finance. With this formula the founders incentive their investors in keeping on investing in the company and therefore, avoid some the major problems of the Full Ratchet (It can also be incorporated in the Weighted Average Formula).

 

Is there something else that helps reducing the dilution risk?

Yes, having the “right valuation” can be, for both the entrepreneur and the early investor, the best measure against dilution. Why is that? Well, the answer comes easy, having a feet-on-the-ground valuation will avoid the issuance of future stock at a lower price as well as will save money in lawyers exercising crazy clauses in crazy terms sheets. I know, valuation is hard but definitely something worth spending some time on.

 

There isn’t a better contract than the one based on trust and transparency

Founders: the Investor is now part of your team (and you aren’t giving anything away).

Investors: the founders love the company and more than anyone they want the company to succeed… they don’t want to run with your money away!

Guys, let’s work together!!

 

So…I started writing this post for my own sake, it isn’t perfect and it doesn’t cover all the points but I think now I really understand what is anti-dilution and hopefully you do too.  Now time for a “fat tire”! Hope you enjoyed your reading 🙂

 

Further information at: http://www.stanford.edu/class/e145/2008_fall/materials/The%20Venture%20Capital%20Anti-Dilution.pdf

Erik Mitisek is new CEO of CTA

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If you came to the Colorado Capital Conference last October you may have seen Governor Hickenlooper’s keynote address. Hick’s good friend Steve Foster gave the introduction. At the time, Steve Foster was the CEO of the Colorado Technology Association. Steve Foster stepped down earlier this year to take over as head of GTRI. Now, after a short executive search, Erik Mitisek has been named the new head of CTA.

Mitisek has been associated with the startup world in Colorado for a long time for such a young man. Most recently, he’s been a driving force for grass-roots operations such as Startup Colorado, Denver Startup Week, and BuiltIn Denver.

This news of Mikisek as the head of CTA should put your mind at ease for a bunch of reasons. First of all, the CTA is the largest and most influential technology association in the state. Aside from networking and business-connecting activities, CTA works to guide public policies that affect technology businesses in Colorado. Since technology moves so quickly, it’s very hard for legislators to keep up with all the new opportunities on the horizon. Laws can hold back startups and larger businesses without meaning to. CTA opens the line of communication so that our state legislature paves the way for technology instead of standing in the way.

One of the biggest issues that faces Colorado is that of attracting companies to Colorado and retaining them once they grow. CTA supports the policies and initiatives that draw national attention to our state as a place where businesses thrive. By educating home-grown STEM talent in Colorado, we foster the ecosystem of growing technology companies. CTA is also highly supportive of initiatives that improve access to capital which is something we think about all day here at Rockies Venture Club.

Mitisek is a highly capable leader who genuinely cares about businesses in Colorado. He has an impressive resume including two stints as CEO (Next Great Place, and Claremont Information Systems) and was recently named one of Colorado’s 25 Most Influential Young Professionals by ColoradoBiz Magazine. Don’t even bother being impressed yet because this is only the beginning.

On Mitisek’s watch, CTA will become fundamentally integrated into the fabric of Denver. He will do exactly what he does best–connect grass-roots everyman needs with the administrative efforts of the state government and non-government community leaders. He will help focus the funding power of local foundations who state in their missions a desire to support economic development.

Most of all, Erik Mitisek will remind us that technology is not just for the proverbial software engineer. We all carry a powerful computer in our pockets everyday. We all need to understand how technology can help our businesses market products better. We all need digital security and data storage for our personal information, photos, address book, and recipes. We are all technologists. There’s no more denying it.

Write your well-wishes to Eric Mitisek (or the tasks you want him to handle first) in the comments and I’ll pass them on to him.

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Article by Nicole Gravagna, Director of Operations for the Rockies Venture Club.

 

 

Bringing big problems to Denver

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An original guest post by Jay Holman, Principal of Venture to Market

101010Denver

Update: Get information about 10.10.10 on 101010denver.com

10.10.10 will Bring Big Problems to Denver

Entrepreneurs have a unique ability to see opportunity in the problems others face, and they are irresistibly drawn in by the desire to create, and sell, solutions to those problems. This is the guiding principle behind the upcoming 10.10.10 event in Denver, which will bring 10 would-be CEO’s to town for 10 days to brainstorm solutions to 10 big problems. The goal is not just to see if participants can come up with feasible solutions to the problems, but to go beyond that by turning one or more of those solutions into successful startups led by members of the group.

The brainchild of Denver entrepreneur and Vokl founder Tom Higley, the 10.10.10 is an experiment to see whether the creative genius that leads to startup success can be reproduced in a laboratory environment. Along the way, the event will highlight the positive business climate and culture of the Denver area, which was already given a boost recently when the SBE Council named Colorado one of the 10 most entrepreneur-friendly states.

The 10.10.10 is not a business plan competition; instead, it is about collaborative business plan creation. When CEO level entrepreneurs apply to participate, they will identify a problem they’d like to discuss with the other participants. They won’t suggest a solution in their applications; those suggestions will come during of a 10-day working session in Denver during which all 10 participants work on all 10 problems. If a feasible path to a solution emerges for one or more of the problems, it will be developed into a business plan.

The focus will be on big problems, as bigger problems lead to bigger opportunities. Since a primary goal for this exercise is to start one or more profitable businesses, applicants will need to provide proof that large companies or groups of consumers are willing to pay for a solution to the problem the applicant describes. That means charity projects are out (sorry Jimmy Carter, but if all goes well the participants will be in touch after their exits).

So, will it work? Like any experiment, or any startup for that matter, 10.10.10 has its risks. 10 days is not a long time to come up with a solution to a major problem, and participants won’t have much of an opportunity to gather additional information to flush out the details of their proposed solutions. Lots of problems seem easy to solve until you look at the details; hence the ubiquitous pivot.

However, there is something to be said for taking a step back, putting your head together with a group of smart people with access to capital, and looking for good opportunities that others have missed (I refuse to use the term “low hanging fruit”). How many times have you asked yourself, “why didn’t I think of that?” after you see someone strike it rich for rebranding off-the-shelf paint as liquid paper or repurposing a small box as a humane mouse-trap? There are so many solvable problems out there that I think a group of successful entrepreneurs with resources should be embarrassed if they don’t knock a few off and make a bundle in the process. Just don’t forget Jimmy on your way home from the bank.

Jay Holman is Principal of Venture to Market LLC, a Boulder based consultancy providing go to market services for new ventures in the cleantech industry.

101010 Denver 101010Denver

 

 

 

Fundraising: Friends, failure, and excellence

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Fundraising in all its forms is about three things: having a reputation for excellence, developing true friends, and accepting failure.

Getting people to give you money is one of the hardest things on the planet. Ask anyone to give you clothing, food, time, a couch to sleep on, or their car for the day and you will likely be more successful than if you ask for money. Don’t be mistaken, it’s not about the value of the money. Frankly, time is our most precious resource. Yet, people seem very willing to offer their time. The scarcity of the resource doesn’t seem to matter.

Cash money has a universally defined value. One US dollar equals 0.76 Euro, 54.56 Rupees, and 6.38 Kronor. Across the planet, we can all agree how much our currency is worth in relation to other currency.

Applying cash value to the value of goods can get a little tricky. A watch is not always $50. You can pick one up for $14.99 at Target. Or you can get a real deal–save $43,355 on a blinged out Rolex on sale for $439,995.

Reputation for Excellence

What’s the value in the Rolex Oyster Perpetual GMT-Master II Ice timepiece versus the Merona round face watch with changeable strap? I’m going to venture a guess that it isn’t the sense of peace you feel when you walk onto a crowded subway wearing it.

It also isn’t really about the way the watch looks. I have an expensive watch that was given to me as a gift. It was a hand-me-down from someone who can afford the luxury of an expensive watch, two actually, since I gained ownership of this one when they bought a new fancier version. I’m not known for my lavish income and I’m guessing that people have no idea that it’s expensive. To that point, the Rolex serves to reinforce a person’s brand, not create it. A poor man wearing a Rolex looks like a poor man with a knockoff. However, for the right man, the Rolex Oyster will serve to reinforce the idea that he is doing very well indeed.

This brings me to my first point about fundraising. Rolex has developed a reputation for excellence. The value of a  Rolex is higher than that of Merona which has a reputation for affordability. Those who shop for Rolex don’t question whether the particular watch is worth the price tag (of course it isn’t). They are paying for an item that will support their personal brand.

Whenever you are fundraising, you have to have the reputation for excellence so that the person giving you money will feel as though you are supporting their personal (or business) brand.

Make True Friends

Sometimes you will get very lucky and a random person holding cash will knock on your door to tell you that they want to give you the money. Ok, you’re right. That never happens.

You must create a relationship with a person (or institution) before you can ever hope to get money out of them. Apply this in your head, right now across all the situations where people exchange money.

  • Customers want to know the business and product will be around for a while and that they can depend on it.
  • Donors want to be (or feel) involved with the mission and activities of the organization.
  • Investors want their money back in 5-7 years, and they want to have a successful portfolio to chat about at cocktail parties.

Think about it on a personal level. How often do you buy a brand you’ve never seen or heard of before? How many charity causes have you given money to? Let me guess, someone you knew was running a race or otherwise raising money for the charity and you gave to support Breast Cancer research, but deep in your heart, you gave because you wanted to see your friend happy.

Investors give money to the people they like. They have to qualify their investments by calculating whether the investment has the possibility of making them a lot of money. But it’s not the future trips to Tahiti that make them sign the check. It’s the knowledge that they get to be involved in the company as it grows, if only to drop knowing comments about the company’s burgeoning success to their friends.

You can get a lot closer to your fundraising goals by developing real relationships with the people who can help you access capital. I’m not talking about the, “let’s do lunch” schmoozing stuff here. I’m talking about remembering birthdays, being genuinely curious about how someone’s child did in their big soccer game, and really enjoying the person for reasons that have nothing to do with money.

Learn to accept failure

Failure is almost as complicated as money. When you fail, you feel way more miserable than the failure should actually feel. A failed marriage can bring an otherwise successful person to disability and depression for a year or more before they buck up and move on. Getting fired, losing a big account, having a stock portfolio crash, all these things make people feel worse than the failure actually requires. In short, we are very bad at getting over it.

When you ask someone for money and they say no, you might feel terrible. You stuck your neck out and got rejected. You might even feel like cutting ties with them. They clearly aren’t supportive. Right? To be clear, a no is not a rejection. It’s not a failure, it’s an open ended sentence…. It’s a relationship that you need to build before you can get to the possibility of a yes.

I guarantee if you try to raise money for anything, you will hear more nos than yeses. Accepting that as a part of the process will make fundraising much easier.