3 Ways To Fund Your Start-up

Finding capital is no easy task. Lots of start-ups struggle early on with where to find the capital they need to bring a great product (or service) to market or to tend to a broken technology in need of some work.  Funding Your Dreams: Calling All Entrepreneurs, a panel at this year’s WILD Summit, covered just this.  Once you’ve determined how much capital you need, how do you put together your fundraising strategy?  Who do you ask for funding and are you offering something in return?  What do you need to know before you start? Read more

How Investors See the Best Companies at Angel Capital Summit

The crop of companies presenting to investors at this years’ Angel Capital Summit are truly outstanding.  Some people may believe that these awesome companies just fall into our lap, ready to pitch and raise capital, but nothing could be farther from the truth.  The selection process for the Angel Capital Summit is rigorous and the preparation companies go through is even tougher. Read more

10.10.10: Helping CEOs Find The Next Problem To Solve

10.10.10 is an innovative program that combines 10 wicked problems, 10 prospective CEOs, and 10 days together in Denver. The bigger the problems the bigger the opportunities, and they’re intent on finding the most massive problems out there and empowering CEOs to create solutions. The first program launches in August, 2014 and is the first of its kind. Read more

Colorado Startup Report – Great Year for Colorado Exits!

Read more

How do Angel Investors differ from Venture Capitalists?

angel investors vs. Venture capital

In many ways Angel Investors are looking for the same things as Venture Capitalists, but there are some big differences that companies should be aware of that will play a part in shaping their financing strategy.

Here are a few obvious contrasts that you should be aware of.

Let’s start with Definitions:  An angel investor is a high net worth individual with a net worth excluding their home of $1 million or more, or who has an income of $200,000 per year (or $300,000 for a married couple) with the expectation that this income will continue into the future.  Angels differ from Friends and Family who will typically invest very early on when all you’ve got is an idea and who will invest in YOU rather than in your company.   Venture Capitalists are typically formed as Limited Partnerships in which the Limited Partners invest in the Venture Capital fund.  The fund manager is sometimes called the General Partner and the job of the General Partner is to source good deals and to invest in the ones that they think will return the most money to the Limited Partners.

Size of Investment:  Angels investing as individuals typically invest between $25,000 and $100,000 of their own money.  While there are deals that are more than $100K and less than $25K, this is the area most angels fall into.  Angel Groups work to syndicate many angels together into a single investment that may average $750,000 or more.   Angel groups are becoming more prevalent and are a great way to get investment more quickly and all at the same terms.  Venture capitalists invest an average of $7 million in a company.

Stage of Investment:  Angel investors are typically investing in deals earlier than Venture Capitalists.  They don’t like to invest in anything that’s just an idea, so the entrepreneur starts with Friends and Family to finance the early stage of the company up to where there is perhaps a prototype or Beta versions of the product.  Angel investors most commonly fund the last stage of technical development and early market entry.    Venture Capitalists will then come in with a “Series A” investment to take the company through rapid growth and rapidly develop market share.  VCs will help a company to grow until they are ready to go public or be acquired, so the dollars they invest will be increasingly larger and larger as the rounds progress.

Due Diligence:  Angels range from due diligence that might include having coffee or lunch with an entrepreneur to doing more thorough background checks and research with experts.  When angels invest in groups they tend to do more due diligence than they do as individuals.  Venture Capitalists have to do a lot more due diligence because they have a fiduciary duty to their Limited Partners.  Venture Capitalists may spend as much as $50,000 or even more to conduct thorough research on their investment prospects.

Decision Making: Angels make decisions typically on their own and are not beholden to anyone except perhaps their spouses.  VCs will have an investment committee who will work together to make decisions so that they are as objective as possible and won’t be swayed by just one member’s excitement over a deal.

Returns: Angels are investing earlier than VCs and so they have a higher risk to take into account.  Despite this, they tend to look for about the same kind of returns that VCs look for – something like 10X the investment over five years.  The reason they look for such a high return is that half of their investments are likely to go belly up and not return anything to the investor.  VCs and Angels want to see a return across their entire portfolio of investments that is 20-30% per year.

Time Frame: Most Angels and VCs look for an Exit, or Liquidity Event in which they get their money back, within three to five years.  Some investments take longer, of course, but Angels need to get their money back and VCs are even more under the gun since a typical Venture Capital Fund has a lifespan of ten years, after which the fund must return all capital and profits to the Limited Partners.

Board Involvement: When angels invest as a group, there will typically be an angel from the group who will sit on the board and represent the investors’ interests.  If the angel is a significant contributor, then they may stay on the board even after venture capitalists invest.  In other cases, the VC will take the seat representing the investors and the angel may stay on as a non-voting observer, or may retire from the board entirely.

Angel vs. Venture Capital Strategy:  Raising capital from Angels is hard work.  The capital raise always distracts entrepreneurs from doing the actual work of building product and getting in contact with customers.  Entrepreneurs should try to put off their capital raise as long as possible, so that they can build value and get a higher valuation for their company before raising capital and diluting their equity.  Sometimes angel investment is a great way to get enough traction to capture the eye of a good Venture capitalist.  Other times angels will continue investing and you might never need to go to a VC.  Your strategy for angels vs. VC investment will include factors such as 1) your ability to work for extended periods with little or no income, 2) the availability of Angel Investing Groups in your area, 3) the number and types of VCs in your area.  (e.g. do they invest in early stage companies, etc.) and finally, because money is an accelerator for business, you will need to determine the need for rapid development of product and market.  If your project is highly capital intensive and there are others who are nipping at your heels, then you probably have no choice but to raise capital as early as possible.  If your strategy involves starting with Angels and then going to VCs for Series A investment, keep in mind the following: 1) angels will usually want 20-30% of your equity for their investment so be sure to keep enough equity available for follow-on investments, 2) make sure your documentation is VC Friendly.  Use standard term sheets (check out nvca.org for a good template).  Your deal should look as much like other deals in terms of incorporation, term sheets, board structure, etc. in order to be attractive.  3) Try to eliminate or minimize participation of non-accredited investors in your deal.  Even though you can legally have a certain amount of non-accredited investors in certain types of deals, it’s best to leave them out if you’re going the VC route.

Good Luck!

 

Register for Angel Investors UnpluggedFor more information on Angel Investing (either as an Angel or an Entrepreneur) consider attending the Colorado Capital Conference Tuesday and Wednesday November 15th-16th. We will have an audience of experienced Angel Investors examining 8 companies that are currently raising early stage capital in addition to two panels and two keynote speakers.

Angel Investors or those who want to learn about Angel Investing in Denver, may consider our Angel Investing Accelerator on Thursday, November 10th

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Peter Adams is the Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies, John Wiley & Sons, August 2013.  Available at Amazon.com, Barnes and Noble and your local bookstore.

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What do Angel Investors Want?

What do Angel Investors Want?  

Rockies Venture Club Angel Investors Unplugged

Click Image for Angel Investors Unplugged Event Information

Every Angel Investor and every VC is different, so you need to do your homework to find out what kind of investments they like, what phase of business they invest in, how big their rounds are, etc.  Once you’ve done your homework on the specifics, here are a few general things I’ve observed that help when working with angels and VCs.

1)      Be Prepared.  The old Boy Scout Motto applies to pitching to investors more than ever.  Many companies are so eager to pitch that they fail to do the homework needed to have a really GREAT pitch.  If investors like your pitch, they’ll want to see your market research, your proforma, your due diligence package and more.  If you’ve got all your ducks in a row, you’re more likely keep the momentum going and to get invested in than if you have to go away for a month after the pitch to get your materials together for due diligence.

2)      Remember that you’re not selling your product, you’re selling an investment in your company.  That means that the product should typically be less than 50% of the pitch.

3)      Finish by talking about your exit strategy.  80% of pitches leave out the exit strategy, so the investor has no idea how you are going to be able to return their money to them. Let them know when you plan to exit, how, with whom and at what kind of multiples.

4)      Practice, practice, practice.   It’s easy to tell the entrepreneurs who have gone through their deck once or twice and those who have really practiced and honed the pitch.  Watch Steve Jobs presentations on YouTube to watch a well-rehearsed presentation.

5)      Tailor your pitch to your audience.  One of the best pitches I’ve seen was given twice in one week.  The first pitch was to a hardcore group of investors and the founder focused on the financials and the huge exit potential.  Two days later he pitched to a group of Impact Investing Angels and focused on the social impact of this investment.  He closed the deal in just a few weeks.

6)      Describe a Clear Path from Point A to Point B.  You would be surprised how a clear strategy makes all the difference in a successful pitch.  Companies that have a detailed strategic plan can describe clearly how they will get from being a startup to having a successful exit and all the steps in-between.  We all know that no strategic plan is followed to the letter, but companies with a plan are able to present a plausible case for success while those without a clear plan have nothing but hope.

7)      Finally, the most important part of your pitch has nothing to do with the pitch itself.  Remember that investors want to invest in PEOPLE, not an idea.  So take some time before you pitch to get to know the investors.  Ask questions about them and what kind of investments they prefer.

 

Characteristics

Companies selected by Rockies Venture Club share these common characteristics:

1)      Team: the team is experienced, connected and has demonstrated an ability to execute and work effectively together.  RVC focuses primarily on the team because we know that no company executes it plan as stated in the pitch and we look for the leadership, wisdom and experience to pivot and adjust to opportunities and threats that present themselves.

2)      Disruptive or Innovative Product: We are looking for companies with a product or service that is unique and presents a clear value proposition for its customers.  There should be sufficient barriers to entry either through trade secrets, patents or significant market adoption in order to gain and maintain their market.

3)      Large or growing market: RVC companies are growing typically at the rate of 100% every year.  They need to be in a sufficiently large or dynamic market that this rate of growth can continue for several years and provide promise of future growth for potential acquirers.

4)      Traction:  Since the fund does not invest in ideas alone, the company will need to be able to demonstrate traction.  They need to have overcome major obstacles that clearly demonstrates their ability to execute.  Furthermore, they should have positive momentum that we can see throughout the process of working with them.

5)      Profit Potential: Companies need to have a high profit margin and understand the costs of multi-tier distribution and all of the fully loaded costs.  After all is said and done, for a company to really grow we want to see a solid bottom line.

6)      Scalable: The products and markets need to be able to grow quickly and to have rapidly increasing margins as the company grows.  This excludes most service businesses and many businesses that address the SMB market and require a high-touch sale.

7)      Exit: The Rockies Venture Club focuses on companies that understand the importance of the exit and the role it plays in returning capital to investors.  We want to see an exit scenario with multiple bidding acquisition prospects, with high multiples of EBITDA or sales, and with a relatively short timeline, typically between three and five years.

 

Register for Angel Investors Unplugged

For more information on Angel Investing (either as an Angel or an Entrepreneur) consider attending the Angel Investors Unplugged event, Tuesday January 14th 5:00-7:30PM at the CSU Denver Event Atrium 475 17th Street, Denver, CO   We will have a panel of experienced Angel Investors sharing how they think about the deals they invest in, plus we’ll have four pitches from companies looking for Angel investors through Rockies Venture Club Angel Groups.

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Venture Capital For Dummies

Peter Adams is the Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies, John Wiley & Sons, August 2013.  Available at Amazon.com, Barnes and Noble and your local bookstore.

Tech Startups: Apply your software skills to the venture capital pitch

I meet a lot of really smart tech founders who have all the skills to create great software that adds huge value for their clients.  The problem is that these tech founders who know all about how to design software from beginning to end, that all ties together in a coherent whole and connects everything from inputs to outputs, seem to forget everything they know when it comes to giving their venture capitalPitch for Venture Capital pitch.  Here are a few tips for taking those skills and repurposing them to putting together a great pitch.

1)      User Interface – A great pitch should have a great User Interface.  Your brand shows in the way that you compose your message and the slides that convey it.  Many tech founders use awkward blocks of text and don’t convey information well.  The user experience is one of the most important parts of the pitch.

2)      Simplicity– The pitch should be easy to understand.  I’ve seen complex bioscience companies who know that they are pitching the company and not their peptides or whatever.  Explain only enough to show that there’s a market, but don’t take us through all the nuts and bolts.  Your pitch should be like well written software that looks simple, even if it’s complex behind the scenes.

3)      Tell a Story– connect each part of your pitch together so it flows logically and covers all the bases, but also ties together into a story that hangs together like a good software program.

4)      Validate your data – you know how to do this when you’re populating your databases, why don’t you do that when you’re putting your pitch together too?  Do some market research and work up a proforma with defensible, well researched numbers.

5)      Learn the rules – software development is part art and part rule based.  If you can’t get the rules right, your software won’t run.  Venture Capital has its own set of rules.  Learn how to play the game and research best practices and understand how VCs work.  Learn the rules and follow them to increase your chances of getting funded.

6)     Not just an MVP – If you want to get funded, it’s important to get all your ducks in a row to gain trust with investors.  Especially when syndicating with Angel Investor groups like Rockies Venture Club it is important to be able to create excitement and gain momentum.  You won’t be able to do this if you have to go back to the drawing board for a month or more to work up your due diligence package and basic research.

7)      Test – test – test  – You know about the importance of testing and Quality Control for your programs.  A huge percentage of your development time is focused on making sure everything works right.  Take that same attitude towards your pitch and practice on everyone you know and keep refining the pitch and above all, don’t just try to wing it.

In summary, you’ve spent years developing the craft of becoming a developer.  People respect you because of your knowledge and expertise.  Realize that seeking venture capital is not just a sideline, but is something that will take up at least half your time or more until your round is closed.  And once that’s done, you’re probably ready to start on raising your next round.  Understanding the rules of venture capital is not just a nice-to-have skill  – it’s something you’re going to use for the rest of your career, so take the time to learn and do it right.

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Peter Adams is the Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies, John Wiley & Sons, August 2013.  Available at Amazon.com, Barnes and Noble and your local bookstore.

Why Venture Capital Investors Should Want to See Your Five Year Financial Proforma

Many entrepreneurs and VCs alike are hesitant to produce a proforma for more than two years out into the future.  They claim that it’s impossible to know what will happen and that the third year and beyond are “just numbers.”   While I would agree that nobody expects a startup to perform according to its projections, I am heartily in disagreement with the claim that a five year proforma doesn’t tell us anything.

venture capital proforma

First of all, let me say that it’s totally ridiculous to think that even a two year proforma has some degree of accuracy.  The earliest launch dates are typically missed and the first two years are highly variable – perhaps even more variable than years three and beyond.  So, if you’re going to say that you can’t predict years three through five, I will counter that you might as well abandon the effort all together since nobody has a crystal ball that extends to two years, much less five.

Why do I want a proforma out to five years (or more)?

1)      I am focused on the EXIT.  I want to know clearly how you plan to get from Point A (where you are today) to Point B (your exit strategy).  I want to see how you think and how big you expect to grow.  If you’re only planning on growing to five million in sales, and that’s your best case scenario, then maybe I’m not interested in investing.  I want to know what you’re shooting for.

2)      I want to know if you can SCALE.  I see a lot of entrepreneurs who are good at running companies with up to twelve employees.  But there are relatively few who know how to grow a big company, develop partnerships, put systems and metrics into place and scale up BIG.  Your numbers will show me that you know what it takes to scale and the resources required to do it.  I recently reviewed a proforma for a company that projected $35 million in sales with three employees.  Even with outsourcing their manufacturing, it didn’t make sense.

3)      I want to know how you THINK.  Are you detail oriented and able to develop your numbers from the bottom up, or are you just taking a percent of your total projected sales?  Do you understand the factors that will impact your growth and the costs that will accelerate or decelerate growth?  Do you show a straight line growth curve or does it vary wildly from year to year?  Do you understand the common ratios for support staff, sales and management at each level of growth?  Even if you’ve got a disruptive strategy that operates more efficiently, I want to see that you know what the norms are and how your new methods will be more efficient.

4)      I want to know how you came up with your VALUATION.  I use five different valuation models when assessing investment in companies and three of them are based on your exit strategy and the exit value is typically going to be some multiple of sales or EBITDA.  I will adjust your sales figures to what I believe are realistic, but I also want to see how your valuation relates to your projected sales.  Are you picking a valuation out of the air or are you doing the work to research and find ratios that make sense?

5)      I want to know how long it will be before I get my MONEY BACK.  Are you planning on an early exit within two or three years, or does your strategy take five to seven, or is it eight or longer?  These numbers will be critical to my investment decision since I don’t want to be in deals that take longer than seven years to liquidity.  If you think it will take eight years, then it will probably take ten and I’m not going to be hitting my investment objectives.  I calculate my returns based on Internal Rate of Return which is a ratio of total return of capital over time, so the longer my capital is out, the lower my IRR.

So, if you’re pitching to a VC, it can be in your best interest to show all years projections between now and your exit – and most VCs are realistic in knowing that if you actually hit your numbers that it will be a miracle.

 

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Peter Adams is Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies (John Wiley and Sons, 2013)   Available at Amazon, Barnes and Noble and your local book store.

Venture Capital For Dummies

Measuring Impact Investing

 

Impact Investing Metrics

Rockies Venture Club Impact Investing

Impact Investing is a term that has a wide range of interpretations. In order to have credibility, consistency and clear understanding about what constitutes success in impact investing it’s important to have a clear set of metrics to understand the social, environmental and economic impacts of impact investments.

Impact is Big Business

The impact investing industry is growing fast with over a trillion dollars of investment over the next decade according to JP Morgan research reported in Business Ethics magazine.   Funds that are investing for others find more and more reasons that they need to have clear metrics to demonstrate that they are carrying out the mission of the investors.   While each fund may develop their own metrics individually, there are huge benefits to utilizing an agreed upon set of metrics across the industry to allow for apples-to-apples comparisons among funds.

Using standardized metrics provides a framework in which larger and larger amounts of investment can be made by sophisticated funds.  The result of this is that impact investing funds can eclipse philanthropic efforts in improving health, education, environment and quality of life for underserved markets.  There will always be a place for philanthropy, but research has shown many for-profit organizations have been able to bring greater impact with greater long term sustainability than those non-profits that provide one-time support.

While individual impact investors don’t have concerns about accountability or credibility, they should also be using metrics to help them understand and evaluate the deals that they are considering and to be able to hone their investing strategies to balance financial and social/environmental outcomes.  Individuals will want to understand their investing goals, but will also want to be able to select impact investments that match and support their own values.

Global Impact Investing Ratings

In 2011 B Labs worked with over 200 impact investing funds to create GIIRS (pronounced “gears”), the Global Impact Investing Ratings System and its IRIS Registry for impact funds.  Since then, GIIRS has become the defacto standard for measuring social and environmental impact on investments that are clear and verifiable by third parties.  Impact companies that want to know how they’re doing can take a free impact assessment provided by B Labs that will let them know how they are doing and to test their future strategies against industry benchmarks.  The ability to compare each company’s results based on standardized measures opens up huge new opportunities for B Corporations and for funds alike.  Just as having standardized GAAP accounting guidelines makes investment analysis for public companies efficient, having the GIIRS standard opens the door for large scale investment in impact companies.

Rockies Venture Club Impact Investing

To learn more about B corporations and hear pitches from active impact companies, , consider attending the RVC Impact Investing event Tuesday, December 10th 5:00-7:30PM at the Colorado State University Denver Center Event Atrium 475 17th Street, Suite 200 Denver, CO. Click Here to Register

http://rockiesventureclub.wildapricot.org/Default.aspx?pageId=1349467&eventId=698729&EventViewMode=EventDetails

Impact Investing Success Stories

Impact Investing is not new and has been around since the 1960’s, if not before.  Since that time we’ve seen a lot of success stories coming from impact investments.  With these successes we’re also seeing significant amounts of dollars under management by impact investing funds with returns of 25% and up PLUS social and environmental impact.

Given the lack of early stage startup funding for impact companies, uncertainties with cleantech technologies, lack of governance in developing countries, lack of structured capital markets and exit opportunities in third world countries and the need to provide social and/or environmental impact, it’s a wonder that impact companies can return anything at all to investors.

In our research we’ve found many funds and foundations that have achieved financial success in making impact investments, but it’s sometimes difficult to find specific impact investments that have hit it big.  What is the next “Instagram” of Impact Investing?

Here is a story of a company that hit it big.  The good news is that they are not alone and that impact companies are doing well all the time.

dlight S300-Product-Thumbnaild.light (http://www.dlightdesign.com)  has created a product line of solar powered lanterns that bring light and power to third world communities where community electricity is not available.  D.light makes high quality, affordable solar lanterns that are distributed world-wide with over half a million units delivered each month, delivering light to over 20 million individuals and families.  The users pay less for solar lighting than traditional kerosene lanterns, plus  the lighting allows for greater productivity and income generation when people can work beyond daylight hours.  Students benefit from better study environments and homes are safer and healthier without kerosene fumes.  Finally, the reduction in carbon emissions is significant.  The statistics below show the social and environmental impacts of this company that is turning a good profit at the same time.

25,315,130 lives empowered

6,328,782 school-aged children reached with solar lighting

$767,644,065 saved in energy-related expenses

7,219,013,138 productive hours created for working and studying

1,794,878 tons of CO2 offset

30,807,967 kWh generated from renewable energy source

 

d.light has won numerous certifications and awards and is backed by an impressive collection of venture funds and foundations – all expecting to turn a profit on their investments.  D.light is a “B Corporation” which means that it is a for profit corporation, but that it must meet rigorous standards of social and environmental performance, accountability and transparency.

 

At Rockies Venture Club we hope to find companies like this each December at our Impact Investing Event and support local companies that are doing good all over the world.

To learn more about impact investing and to meet the founders of four great impact companies, consider attending the RVC Impact Investing event Tuesday, December 10th 5:00-7:30PM at the Colorado State University Denver Center Event Atrium 475 17th Street, Suite 200 Denver, CO. Click Here to Register

http://rockiesventureclub.wildapricot.org/Default.aspx?pageId=1349467&eventId=698729&EventViewMode=EventDetails