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!

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.

The finance world lives on the mantra of “cash is king”. Why, you ask? Well, it’s because it’s a company’s cold, hard cash, not its reported profit, that determines the value of a business.

Profit is merely an accounting mechanism. Future cash flows actually pay the bills. And the investors. And, most importantly, the investors’ investors.

But, how does one going about creating this tsunami of future cash? You best believe it’s by buying your customers’ delight and loyalty, which manifests in continued purchasing and future cash flows.

After all, it’s their cash that is ultimately all of our king and your ticket to success.

Here’s a crazy statement…“customer-focused companies are 60% more profitable.” Ok, we’re talking about cash not profit, but you get the point.

Bottom line, focusing on your customers’ happiness is important to ensure steady cash flow.

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Here are 4 steps to generating future cash from customers:

Step 1: Get Customers

This is so obvious that it’s almost painful to type, but let’s be clear here: without customers, you have no one to buy your products. This likely means you have no sales and no customer-generated cash. This, in turn, means you’re beholden to other people (i.e., capital providers) who can provide you with cash. Problem is, these people like customers’ cash too, so the fact that you have none will turn them off. No accounting shenanigans, beautiful decks, or even talent will overcome this on an ongoing basis.

Step 2: Keep Their Business

Acquiring a new customer costs five times as much as keeping an existing customer. So, you better make the customers you’ve already gotten happy; else, you’ll spend more of their cash replacing them with new customers you have to keep happy. This is one reason churn is so painful. Another reason is the extremely dilutive impact it has on your company valuation as you miss out on the compounding magic of compounding recurring revenue growth and its contribution to your future cash flows.

Here’s a simple model we’ve built we’ve built to play with your bookings and churn rates and see the impact on your potential valuation.

Churn's Impact on Future Cash Flow

Step 3: Make Them Mouthpieces

80% of customer service related tweets are negative and critical. That’s a crazy stat. How are we that bad at servicing our customers? It’s probably because we think we’ve done the hard work by getting them to actually pay us. Our onboarding and activation flows are so dialed, they can take care of themselves. Troops, we must find more customers!

I think we all fall victim to this top of funnel mindset. I think we’re suffering from it. We’re missing out on the engagement opportunity to build the relationships that make our customers comfortable to say, “You’ve got to give [your_company_name] a try. They’re amazing!” Which leads us to…

Step 4: WOW THEM

Answer their chats with empathy. Take their calls and listen to learn. Don’t direct them to your FAQ. Don’t point them to obscure features that might kind of solve their problem. Make them want to reach out to you, both because you solve their problems and your enjoyable to interact with.

There’s your funnel humanized. Next, we’ll delve into how to delight the customers who have chosen to give you their cash.


This article was originally published by our friends over at Bigfoot Capital on their blogBigfoot Capital provides growth capital for SaaS businesses that have achieved initial revenue scale ($30K-$150K MRR) by selling to SMBs. Our ongoing capital investments range from $150k-$750k to support efficient growth and help Founders retain the lion’s share of their equity and upside. Beyond capital, we have built relationships with specialized services firms across sales and marketing, product development, and operations to help you scale beyond your current human resources. Want to learn more? Visit www.bigfootcap.com or schedule a time to chat.

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!

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.

Denver, CO – Rockies Venture Club (RVC), one of the largest and most experienced Angel investing organizations in the country, led and closed 15 funding rounds over the past year. RVC has created a community of accredited investors who are passionate about helping early stage companies raise the capital that they need to grow.

This trend of early-stage investing in Colorado is encouraging considering the fact that there has been a downward trend in early-stage activity worldwide. A November 2017 report by TechCrunch shows that despite record levels of Venture Capital being raised, the number of funding rounds has been cut in half since 2014. This indicates that capital is being concentrated into larger, later-stage companies. With this being the trend, it would seem that Rockies Venture Club and more largely Colorado as a whole is providing its companies the capital they need to grow.

According to RVC Executive Director, Peter Adams, “One of RVC’s leading principles is to be as diversified as possible when investing in companies. We believe that investing in a variety of sectors allows our Angel investors to diversify their personal portfolios while having fun learning about industries they don’t have past experience in.” This is something that the Angel group truly puts into practice if their 2017 portfolio is any indication. Among the 15 new companies that RVC backed in 2017, there was industry representation within CyberSecurity, AgTech, FinTech, Medical Devices, and Consumer Products; just to name a few.

In addition to engaging local capital through its network of over 200 active Angel investors, Rockies Venture Club also syndicates many of these deals with other Angel groups from across the U.S. Dave Harris, RVC’s Director of Operations, states, “RVC has been working to develop strong partnerships with other Angel groups for several years now. This allows companies to more quickly and easily close their funding rounds, bring deal flow to other areas of the country, and ultimately results in a greater amount of capital being invested directly in Colorado companies.”

Among the 15 deals, RVC led the seed-round in the female founded, Fort Collins company, The Food Corridor (TFC). TFC is the first online marketplace for food businesses to connect with available commercial food assets. Food businesses can find and book commercial kitchens, equipment, commissaries, processors, co-packers, and food storage spaces. CEO Ashley Colpaart put together a $550k round through Rockies Venture Club, Rockies Venture Fund, and other Northern Colorado Investors. Peter Adams stated, “I believe that RVC investors were especially interested in this deal due to Ashley’s deep industry knowledge and the promising early traction they have gained with food entrepreneurs and commercial kitchen spaces.”

RVC Angels also invested in CirrusMD’s $7 Million Series A Round. CirrusMD is a company that gives patients immediate access to providers via secure chat so healthcare organizations can excel in a value-based care environment. This was the third round that RVC has participated in, having first invested in the company in 2014. Since then CirrusMD has expanded access to care to over a million of patients and formed strong partnerships with some of the largest health systems across the country.

Beyond closing the 15 deals, in 2017 Rockies Venture Club created the Women’s Investor Network(WIN), an initiative created to address the lack of diversity in Colorado’s investor community, launched the Rockies Venture Fund, an early-stage VC fund that invests alongside RVC’s Angel investors, and collaborate with the Colorado OEDIT to create the OEDIT HyperAccelerator, program that helps Advanced Industry grant recipients raise the necessary matching funds.

Looking forward to 2018, the club will be hosting the 11th annual Angel Capital Summit (ACS) in March. The Angel Capital Summit is the largest Angel investing event in Colorado, bringing together over 300 investors, entrepreneurs, and community members together under one roof. This year the conference will focus around current, past, and future waves of innovation that have had or will have lasting impacts on the venture capital industry. RVC is excited to announce that there will be two keynote speakers at ACS this year: Divya Narendra, and Colorado’s own Andre Durand. Dyvia is the Founder and CEO of SumZero, and co-founded ConnectU, the inspiration behind Facebook. Andre is the Founder and CEO of Ping Identity who lead the company through a $600M+ acquisition by Vista  Equity Partners in 2016.

We’ve known for years that Colorado has more startups per capital than anywhere else.  Yes – per capita.  It’s a great location to start up a company and maybe you’re wondering if there’s a Venture Capital infrastructure to support that?  Well, now there’s incontrovertible evidence for Colorado’s leadership position in MicroVCs and it all comes down to … beer.

Just check out this CB Insights research relating MicroVC Tech Deals to Microbreweries.  That’s right – the more microbreweries you have, the more MicroVC deals you get.  And take a look at Colorado’s number 3 position in Microbreweries – what does that tell you?

 

Yes – a vibrant MicroVC community is brewing here in Colorado.  We’re seeing a huge influx of MicroVC and NanoVC funds as the state begins to mobilize its local capital to support its burgeoning startup community.

Ok, maybe that’s just a facetious stretch of statistical comparisons – but there is definitely a rapidly moving trend in Micro Venture Capital and Colorado is feeling the benefits of new sources of capital coming on-line!

This trend mirrors a national trend in increasing Micro VC firms.  Following the drastic drop in VC firms from over 1000 to just over 500 after the economic downturn in 2008, MicroVCs have flourished.  There were fewer than fifty active MicroVCs in 2011 and today there are over 550 in the U.S. A tenfold increase in just a few short years and many of them are in Colorado.

MicroVC is changing the venture investing landscape and is responding to the needs of startups who need small amounts of capital to prove their product market fit and grow big.  MicroVCs offer a scale that the big firms can’t efficiently provide and they get companies up and going quickly and efficiently.

MicroVCs aren’t just for small companies though.  Check out these results from MicroVCs who are growing a new crop of Unicorns (private companies with valuations of $1B or greater)  It’s not just the big funds that are hitting the grand slams – the Micro’s are slamming it home as well.

MicroVCs are creating a huge impact in the startup world and Colorado is the place to see this transformation taking place on a rapid pace.

You can learn more about MicroVC, NanoVC, and how accelerator VC funds are changing how startups get funded, and how angel investors can get involved in new ways previously unavailable to them.  You’ve got just a few days to sign up for the Colorado Capital Conference coming up November 6-7, 2017 in Denver, CO.

Visit www. coloradocapitalconference.org for more

information and to register.

The conference is hosted by Rockies Venture Club, the longest running angel group in the U.S.  Membership is NOT required to attend the conference, but if you’re an entrepreneur or angel investor, this would be a good time to look into the savings that RVC members enjoy on conferences, angel groups, workshops, masterminds and classes.

 

 

 

 

 

 

 

 

 

 

 

 

It seems like a majority of pre-Series A deals are done with convertible debt these days and I’d like to point out a few reasons why this is a bad thing for entrepreneurs and investors alike.

Just to get definitions out of the way, we’re talking about the decision to raise funding for startups by either equity investment in stock of a company, or in a convertible debt instrument.  Equity is pretty straightforward – invest money, get stock.  Convertible notes, on the other hand are not widely known to those outside of startup investing.  Convertible debt works like regular debt in that there’s a promissory note and an interest rate.  The interest is rarely paid in cash for convertible notes though, and it’s usually rolled into equity when the note converts into equity.  There are usually a few “triggers” for h

RVC Convertible debt vs. equity

aving the note convert to equity, but the most prominent one is that there is a “qualified financing round” which is usually around $1 million.  The idea is that the professional investors at that stage know how to value the business and set the terms. The first early investors who invest will convert at the terms set by the VCs, but usually with a 20% discount in price to compensate for investing earlier.  Convertible notes today also have a “valuation cap” which is equal to what the equity valuation would have been if the deal had been a stock transaction in the first place.  So, when the qualified round causes the note to convert, it converts at the lower of the 20% discount or the valuation cap.

Ten Reasons to Avoid Convertible Debt

Reason 1:  Convertible Notes do not qualify for Section 1202 QSBS Tax Breaks<a href="http://www.freepik.com/free-photos-vectors/business">Business vector created by Dooder - Freepik.com</a>

Angel investors get a 100% capital gains tax break if they invest in equity in early stage companies that meet certain criteria such as being a C Corp., being under five years old, under five million in revenue and they hold the 

 

 

 

investment for five years.  Convertible notes don’t qualify for this tax break, so if all things were equal, the investor makes 20% LESS on convertible note deals since they have to pay capital gains tax on the investment, whereas investors who invest in equity do not have to pay any tax at all.

Reason 2: Equity is cheaper than convertible debt

You may have heard that it’s cheaper, faster and easier to do a convertible note, but the fact is that convertible notes are going to end up costing the company approximately 25% MORE than an equity deal.  The reason for this is that when the note converts, then it converts into EQUITY.  That means that the company pays twice for the legal: once to do the note and another time to do the equity.  So if a convertible note cost $2500 in legal fees and the equity deal cost $10,000, then the convertible note all-in is going to cost the company $12,500.  Why not just do it right in the first place and put all that money to work for the company?

Reason 3) 80% of Angel Investors Prefer Equity

If you’re selling something to a customer, wouldn’t you want to sell them what they want and not some more expensive and inferior product?  The American Angel Survey shows that investors prefer equity and I suspect that if the remaining 20% of angels read this blog, they’d prefer equity too.

Reason 4) You can lose your company if you default on a convertible note

When you take out the note you’re confident that you’ll have a qualifying follow-on round within 18 months, but many times it takes longer and the note comes due and payable and you’ve already spent the money and can’t raise any more.  You’re in default and investors can take your company from you.  Most investors don’t want to do that, but why go through the heartburn and stress of facing the potential loss?

Reason 5) Investors have to pay tax on interest they earned but never got

As interest accrues on convertible notes, interest is due.  Investors need to pay tax on those notes, even though they didn’t actually get the interest in cash.  So, if someone invests $100,000 in an 8% convertible note, they have to pay $2640 in cash to the IRS on that income.  Nobody likes paying taxes on money they never got and also, BTW, there is no tax due for equity investments.

Reason 6)  You have to come up with a valuation for convertible notes just like equity.

Many people think that using convertible notes lets them “kick the valuation can down the road.”  Nothing could be farther from the truth.  Every convertible note has a provision called the “valuation cap.”    The formula for calculating the valuation cap is as follows:

Valuation Cap = Equity Valuation

This means that when someone invests in a convertible note, they should never have to pay more than what the company is worth today.  If the valuation cap were higher than equity valuation, that would mean that note investors would have to pay more than the value of the company.  Just because it may convert at a higher valuation some time in the future does not mitigate the risks that the early stage investor has today.  In fact, the only way that the higher valuation comes about in the future is that the angel investor puts in the capital early, when risk is highest, so it doesn’t make sense that they should pay more than what the company is worth.

Many companies get confused about this.  One company told us that the valuation would be $5 million, but it would be $7 million valuation cap “because it’s going to convert at $12 million some day.”   It’s crazy to think that somehow using a convertible note makes a company worth $2 million more than one that uses equity. This kind of thinking makes no sense and hurts the startup community.

Putting valuations on early stage companies is something that is done every day and there’s no magic to it.  Seed Funds and Angel Groups have well established valuation methodologies that work well on pre-revenue companies.

Reason 8) Entrepreneurs get diluted with convertible notes

Entrepreneurs should be cautious about the cumulative dilution that paying interest which will be rolled into equity will create.  The longer the note goes on, the more startups will be diluted with the interest that they have to pay in the form of equity.  It would be better to preserve that equity for future growth.  Founders who chose equity over convertible debt don’t have to worry about interest accumulating and diluting their shares.

Reason 9) Equity creates better alignment between investors and founders

When convertible debt is used, there is a misalignment between investors and entrepreneurs.  Founders want to use high valuation caps or worse, no valuation caps, and prolong the amount of time before conversion, so that investors get the short end of the stick.  Some founders openly state that they want to use convertible debt to preserve their equity.  Those are founders that every investor should avoid – not because they want to build a strategy that preserves equity, but that they want to create unfair terms that preserve equity at the expense of investors.

Reason 10) Equity deals have all the terms defined

With a convertible debt deal, the conversion price is negotiated, but all the other terms which are extremely important to the relationship between the founders and investors are left open.  This represents a risk to investors and also leaves many matters unsettled.  One example is that there are usually terms about board representation which are not found in convertible notes.  Investors in early stage companies can offer much more to companies than just a check if they can serve on boards and help move the company along.  While there’s nothing to say that companies with convertible notes can’t have boards, in fact many don’t and that’s bad for both investors and entrepreneurs.

Last Words:

With all that being said against convertible notes, they can still be useful for the FFF rounds with friends and family who don’t know how to value a deal and who are investing primarily to support the entrepreneur.  Convertible notes can be better than some of the amateurish deals that get put together for early family investors who are often non-accredited that can make follow-on investments difficult or even impossible for the company, thus limiting its chances for success.

Visit www.rockiesventureclub.org to learn more.

 

Peter Adams

Managing Director, Rockies Venture Fund I, LP
Executive Director, Rockies Venture Club, Inc.
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