If you ask an engineer what stands between them and their dream, they’ll probably make a joke about debt. If you throw a pile of cash at an engineer and ask them again, the problem may be solved, or they may tell you, “It’s just not possible yet”. New materials have been at the forefront of every technological or industrial revolution in history. We title eras of history by the materials that defined them, from bronze to steel, leading up to today’s so called ‘Silicon Age’. Electricity and fertilizers shaped the 20th century’s population boom, and progressively lighter, stronger steel gave it further form. As we begin to outstrip the capabilities of the materials that made our achievements possible in the past, materials engineers are rapidly pursuing new, novel materials to drive our advancing needs. Case in point, 2017 was the year of graphene with its promise to reshape how we do everything from computing to water filtration. 2018 is shaping up to be a year of silicon, lithium, and cobalt as we sprint towards newer, better batteries; bioconcretes are looking to be the future of roads and construction. Questions then arise. What technologies will drive the next wave of growth? What are engineers building now that will shape our next major wave of new inventions? What will those markets look like in 5 years? Ethan Harden, an analyst on the VCA team at RVC, has created an Industry Outlook about nanotechnologies and the advanced materials they’re driving. You can read it here.

Convertible debt is commonly used in seed stage transactions, and for anything but friends and family, or a true 90 day or less bridge, I cannot understand why anyone would use these to fund a company, regardless of whether you’re an investor or founder – it’s equally bad for both.

Fallacies about convertible debt - peter adams

There are a lot of otherwise smart people out there who continue to support fallacies about the

 benefits of convertible notes.  I’ll walk you through the claims and show you how they are not only wrong, but are the exact opposite of many people’s beliefs.

 

Fallacy #1:  Convertible Notes are Cheaper than Preferred Equity Deals.

This belief comes from a shallow idea of the cost of a note.  While it’s true that the legal costs for doing a note are $2500-$5000 in many markets and the cost for doing a preferred equity round can be as much as $10,000 to $20,000, there are other costs to consider.

If the note is for two years, for $1 million at 8% interest, then the entrepreneur is going to have to pay $166,400 in interest.  Some will argue that this is rarely paid in cash, but it is still a huge amount of dilution for the company and represents a real cost to them.  So, when does it make sense to “save” $15,000 when it costs $166,400 to do so?

The other part of the fallacy of this thinking is that the note cost is the only legal cost.  In fact, the entire premise of the note is that it will convert into equity when the company has a priced round, usually of $1 million or more.  At that time, the company will still have to pay the $10,000-$20,000 PLUS the original $2500-$5000 that they paid for the note originally, That’s right – the founder is really going to have to pay for both, resulting in 25% HIGHER legal costs than just doing an equity round in the first place.

 

Fallacy #2: Convertible Notes are Easier than Preferred Equity

It’s true that a note is only a few pages and very few terms to negotiate and Preferred Equity requires changes to multiple documents; the term sheet, subscription agreement, changes to the articles of incorporation, etc., but in the long run, convertible notes can end up being much more complicated and require a lot of legal time to figure out the ambiguous outcomes.

 

Let me start by saying that “simple” does not mean “best”.  Leaving major terms and issues undecided and unaddressed helps neither the founder nor the investor.  I recently had a portfolio company that almost went out of business for no other reason than that they had used convertible notes injudiciously and they found themselves in default on multiple notes simultaneously.

 

Let’s just consider a simple case of convertible debt vs. preferred equity in two rounds.  Let’s ask ourselves, how many shares does each round of investors get and how many does the founder get?  (Note that this conversation doesn’t occur until conversion, so many founders, attorneys and investors don’t think about these until it’s too late.)

How Many Shares do the founders have after these three rounds?

How many shares do Round 1 investors have?

How many shares do Round 2 Investors have?

How many shares do Round 3 Investors have?

 

Convertible Note

10 million shares authorized and 1 million shares issued to founders at start.

Preferred Equity

10 million shares authorized and 1 million shares issued to founders at start.

Round 1:  $1 million convertible note, 8% interest, 20% discount, $4 million valuation cap.

Round 2: $2 million convertible note, 8% interest, 20% discount, $6 million valuation cap.

Series A Conversion with Priced Round: $5 million Preferred Equity with $10 million pre-money valuation

Round 1: $1 million preferred equity with $4 million pre-money valuation.

Round 2: $2 million preferred equity with $6 million pre-money valuation

Round 3: $5 million Preferred Equity with $10 million pre-money valuation

Round 1: Founders 1 million/ Investors 0

Round 2: Founders 1 million/ Round 1 Investors 0, Round 2 Investors 0

Round 3:  Founders 1 million shares

Round 1 Note holders convert at the better of 20% discount from the priced round or the valuation cap.  Since 20% discount from $10 million would be $8 million, they will take the valuation cap at $4 million.

But wait – we have to calculate Round 2 simultaneously.  They would also take the valuation cap at $6 million, since that’s less than the 20% discount at $8 million.

Now, the Series A investors get 33% for their $5 million on $15 million post-money, right?

Or, since the first two notes are now converting, this round is actually $1 million from Round 1 plus $2 million from Round 2 plus $5 million from Round 3, so the total is $8 million on $10 million pre-money.

So, how many shares do each of the investors get?

Round 1 is $1 million on $4 million cap, so they get 20%

Round 2 is $2 million on $6 million cap, so they get 25%

Round 3 is $5 million on $18 million post-money, so they get 27.8% of the company.

The Founders get what’s left – 27.2% (1-.333-.25-.2)

That works out great, unless the Series A investor has negotiated $5 million on $10 million pre-money for 33.3% of the company.  That’s not technically how it should work since the post-money valuation is $18 million, not $15 million. The Series A investor might want to come in as if the first two rounds were equity and theirs would be the only new money coming in.  This is called “The Golden Rule” – he who has the gold makes the rules. In that case, what does Round 1 get? They should still get their 20% since that’s what they negotiated, and Round 2 should get their 25%. So, here’s how the percentages should work out in this scenario:

Founders 21.7% (1-.3333-.25-.20)

Round 1 20%

Round 2 25%

Series A 33.33%

Alternatively, the Series A investor might require that the investors in the first two convertible notes take the dilution hit instead of the founders.  Or they may figure out a way to share the dilution between early investors and founders. In these scenarios, the people who took the greatest amount of risk can be unfairly treated by later round investors who come in after the deal has been de-risked.

Believe it or not, there are still other ways that this scenario can be calculated and it gets even trickier if there is a carve-out for an employee option pool.   But the point is that there is a lot of ambiguity and this can result in higher legal costs and difficult negotiation after the fact.

Ok, so now we have to turn these percentages into shares.  For the first scenario, the only party to the transaction that we know how many shares they have is the founders at 1 million.  We know that they will own 27.2% of the company, so we need to find the number that 1 million is 27.2% of which will be the total number of issued shares after Series A.  Then we can just apply the percentages to see how many shares each party gets.

So, 1,000,000 divided by .272 gives us a total of 3,676,471 and the shares would be distributed as follows:

Founders = 1,000,000

Round 1 = 735,294

Round 2 = 919,118

Series A = 1,022,059

Round 1: Founders 1 million, Investors 250,000 (Note – investors own 20%, having invested $1 million with $4 million pre-money/$5 million post-money.

Round 2: Founders 1 million, Round 1 Investors 250,000, Round 2 investors 416,667 (Note – Round 2 investors own 25% having invested $2 million with $8 million post-money and 416,667 equals 25% of the total shares outstanding)

Round 3: Founders 1 million, Round 1 investors still have 250,000, Round 2 Investors have 416,667 and Round 3 Investors get 835,836 (again, 835,836  is 33% of the company since Round 3 Investors put in $5 million with $15 million post-money, so the calculation is easy)

 

So, between figuring out the math and negotiating all the ambiguities between the parties, doing the conversion on a convertible note is much more complex and challenging than just going through a vanilla Series Seed term sheet for Preferred Equity.  Anyone can read Venture Deals to learn about the terms and then work with their attorney to come up with a reasonably negotiated term sheet. That’s a lot easier than going through all the headache and ambiguity of converting complex convertible notes.

 

* BlockChain ICO Note:  one more complexity that is becoming more common is that companies are choosing to do an Initial Coin Offering (ICO) rather than going to Series A.  This can mean that the note never converts because there is no priced round to drive the conversion. Again – the complexity is much greater on convertible notes!

 

Fallacy #3 You can Avoid Valuation by Using Convertible Debt

 

Many people falsely believe that they can “kick the can down the road” on valuation by using convertible debt and then letting the Series A investors set the price and terms.  While this may make sense when friends and family are investing, angel investors who are investing for profit rather than family or friendship are going to need to have a valuation cap if they use a convertible note.  You may recall that in the examples above, the cap was always lower than the discount, so if investors had used an “uncapped note” without a valuation cap, they would have overpaid for their investment by millions of dollars!  For that reason, virtually none of the notes done today are done without a valuation cap, so there is still valuation work to be done to calculate what the cap should be.

 

While many recognize the need for a valuation cap on the note, many people do not understand how to calculate the valuation cap.  The formula for calculating the cap is easy:

Valuation Cap = Equity Valuation

 

That is to say, the valuation cap is calculated in exactly the same way that we calculate the equity valuation for a company when we do a preferred equity round.  

 

Venture backed companies grow as much as 2X in value every year – it would be injudicious for anyone to put their capital at risk to invest in a convertible note with a return of only 20%.  At that rate, the angel investing community would pack up their bags and go home when calculating the cumulative losses in their portfolios and lack of tax benefits.

 

I have heard no argument for why the valuation cap should be anything more than what the valuation would have been if it were an equity round.  If anything, it should be lower because of the lack of tax advantages for gains or losses to investors which can cost 20% difference in terms of after tax cash in the bank because of penalties for using convertible notes vs. equity.  (See Section 1202, Section 1244 and Section 1042 of the IRS code to understand the benefits to investors investing in preferred equity deals that are not available to convertible note investors.)

 

Valuation is a function of risk.  It makes sense that the value an investor pays should be tied to the risk AT THE TIME OF INVESTMENT.  Some get confused by thinking that the value should be set at the time of conversion, once the investor’s capital has been put at extreme risk in order to reduce risk for future investors and to increase value for the founders.  There is simply no rationale that says that value should be set at a future date when risk is lower and even less rationale to argue that a 20% discount off the de-risked value would be appropriate.

 

Conclusions

While I’ll grant that there are a few narrow uses for convertible debt today, the widespread use of them in the startup and seed stage investing community is dangerous and unjustified for both founders and early stage investors.  Attorneys should understand these fallacies and lead their clients to preferred equity deals that will better serve the needs of startup founders and investors.

 

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.

How Angel Experience Can Help Social/Environmental Impact Companies.

The paradox in impact investing is that a large percentage of impact investors are hurting the very companies that they want to help.  Neophyte impact investors have not yet figured out the difference between philanthropy and Impact investing, resulting in a confusion that causes serious damage to the Impact business community.

There is a big difference between philanthropy and Impact investing.  The organizations receiving funding are focused on doing good in the world and it doesn’t matter whether they are for-profit of not for them to do good.  In fact, many for-profits outperform non-profits on execution and core metrics for outcomes.  Impact investors should understand their motivations for investing and they should have clear financial and non-financial metrics that they use to create their investment thesis.

 

A non-profit, by definition, does not make a profit.  It is also owned by no one and when it has come to its end or fulfilled its mission, all assets must be donated to another non-profit.  Value creation is strictly focused on mission and core metrics include outputs as well as key ratios between operational costs vs. direct program delivery.

Rockies Venture Club Impact Investing - Exit Focused!

 

 

Social and Environmental Impact investing, on the other hand, creates value on three ways.  The business generates a profit.  It creates measurable positive social and/or environmental outcomes, plus it creates positive economic outcomes for investors and founders.  The fact that the company creates these positive economic outputs doesn’t in any way diminish the company’s need for capital nor does it diminish the impact created by the company’s operations.

To help clarify how investors and CEOs should think about impact investing vs. philanthropy, I’ve put together a sampling of six common arguments that some, mostly new, impact investors put forward, and some responses to those arguments which I hope will clarify the power of impact investing and a more productive attitude towards profitability and liquidity events.

Six Common Arguments from New Impact Investors

Argument: “I don’t want to invest in a company that is just interested in selling out, so I advise companies I invest in to never have an exit strategy.”

Even non-impact investors are wary of investing in a CEO who appears to be in it just for the money, or is planning for the quick flip.  These CEOs likely w

 

on’t have the grit it takes to overcome the many obstacles in their way and will quit half way through, losing everyone’s investment.  There’s a fine line between the quick flip mentality and the strategic CEO who is looking for ways to maximize value and leverage that to increase outcomes for all.

CEOs who hear this argument sometimes change their strategy to exclude an exit strategy, which often means that the net impact the company will have is DIMINISHED because of the short sighted demands of the Impact investor who wants to feel good about themselves in the way that philanthropy makes people feel good.  By focusing on data oriented approaches to strategy, investors can come to understand the exit as a way to expand outcomes, not diminish them.

Argument:” If the companies I invest in are acquired, the acquirer may have different values, thus hurting the beneficial impact that the company creates.”

This argument suffers from a lack of understanding how exit strategies and execution work.  The exit strategy entails identifying the best acquirers for whom the company will provide the greatest value.  This exercise naturally involves understanding the values of the potential acquirer and seeking to build relationships with acquirers who share the impact company’s values and will likely expand on them after acquisition.

So, a company that does not have an exit strategy is more likely to be acquired by a company who has misaligned values and may fail to carry on and expand the mission of the company.  Rather than decreasing the risk of a values misalignment, the impact investor increases the chances of misalignment by refusing to support talk of an exit strategy.

Argument: “Impact companies should just focus on creating a positive impact and growing a significant company and not on an exit.”

 

This is one of the weakest arguments against an impact company’s focus on exit, and it is one that is commonly waged against tech startup CEOs, leading to confusion and underperformance in many cases.

Let’s start by remembering the Second Habit of the Seven Habits of Highly Successful People – “Begin with the end in mind.”  This habit is just as important for impact companies as it is for people.  Those who focus on the end and develop a clear path to get there are 65% more effective in achieving those goals than those that try to “just build a big company.”

Impact companies create value in three ways, and I don’t just mean the Triple Bottom Line.  Impact companies create value through creating a valuable good or service which is able to compete in the market and create revenues and profits.  Impact companies create value because their goods or services themselves create positive social or environmental outcomes.  Finally, Impact companies with exit strategies understand how to create value for their acquirers, and those acquirers are often willing to pay a multiple of revenue to get it.

RVC Impact Investing Return vs. Impact

 

 

Any company needs to understand its core value proposition for its customer.  What smart Impact CEOs and their investors will do is to ask what the value proposition is for its second customer too – the customer who buys the whole company.  That value proposition is not always the same as the value proposition for the first customer and having a clear understanding of those differing value propositions can be the difference between success and the walking dead.

So, companies with an exit strategy are 1) more likely than others to be successful and 2) will create wealth for investors and founders which can 3) be reinvested into new Impact companies to create an evergreen cycle of positive social and environmental impact.

 

Argument: “You can’t control the exit, so it’s a mistake to try to pretend that you can.”

People who don’t believe they can control the exit, may also believe they can’t control the market or the customers for their products.  They might just as well stay in bed – they can’t control anything and are fairly weak leaders of companies.

Great Impact leaders create their futures.  They may not be able to control all aspects, but they can create an environment in which their thesis succeeds.  Great leaders will drive towards scenarios that align with their values and

business goals.  Just because you can’t control every externality does NOT mean that you must throw up your hands and refuse to plan for the future.  It is exactly because of the uncertainty of the future, that exit planning is imperative.

Argument: “Social and Environmental Impact companies are not acquirable, so they should just focus on impact.”

Companies should BEGIN with the end in mind and create all three Impact value propositions (profit, impact, exit).  Companies that create profit and

impact should be highly acquirable, and by thinking about it from the beginning, value of all three kinds can be baked into the core strategy.

When it comes time for exit, it’s not a cop-out or sell-out of values.  I think of it more like a “commencement.”  Just like when someone goes through Commencement at the end of high school, it doesn’t mean that they’ve ended their path towards education, but rather it means that they’re graduating to a higher level of execution by going on to university.  Few would say that commencement in any way diminishes the quality of the person going through graduation.

So too with a company going through an exit.  By being acquired the company can further its mission tenfold or more by leveraging the capital, sales channels, R&D, brand and other resources that the acquirer can bring to the Impact company.  The net result is the opposite of a cop-out, but is rather a commencement of something even bigger and the Impact investor should be right next to the Impact CEO, helping them to achieve that end.

RVC Impact Investing

Investors who believe that making a profit is bad should stick to philanthropy.  If they need to lose money to feel good about themselves, philanthropy is a quick path to 100% financial loss.  Even a zero interest loan to a non-profit results in a profit of zero which is 100% more than a philanthropic gift.  Investors who have a problem with Impact companies being profitable should stick to philanthropy rather than dragging down promising Impact startup CEOs and limiting the evergreen effect of reinvestment.

The more that Impact investors focus on achieving positive social and environmental outcomes along with value creation, the more capital will be available to support Impact startups and the more good will be done in the world.

Impact investing is at an inflection point and is growing at an astronomical rate.  The global market for impact investments is expected to top $300 Billion by 2020.  Capital is chasing Impact deals because of a new breed of Fund managers who apply the discipline and expectations of venture capital to Impact.  The more we see of this kind of investing, the better the Impact Investing space will be for everyone.

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.

 

 

 

 

 

 

 

 

 

 

 

 

Rockies Venture Club

Rockies Venture Club Post-Funding Strategies

After the first angel or VC funding round closes and the checks are cashed, most startups go through a transformation, like from a caterpillar to a butterfly, that makes them fundamentally different than a pre-funding company.  CEOs who fail to realize the changes that need to happen will end up facing challenges they did not expect.

Here are a few changes that need to take place after funding:

  1. Create a budget.

    No – not your proforma with all the optimistic sales projections – this should be a budget with numbers you can commit to.  Many companies feel like having a million dollars in the bank is an unlimited blank check to buy fancy new furniture or hire a dozen new employees. But all those things drain cash faster than you think and having a written plan for minimizing your burn rate and maximizing the runway to your next raise (or hitting break-even) is going to be an important part of your success.  Running out of cash before you hit the milestones needed for the next raise is a death sentence for your startup.

  2. Update the Professionals that Serve Your Business.

    If you’ve had your Aunt Bertha doing your books, it’s probably time to upgrade to a CPA who can provide you with the advice you need to keep from making mistakes.  A CPA is going to be important once you need audits as well.  Your legal team should now include several different legal specialties including securities, Patent and IP, and general business and contracts.  You probably got your legal house cleaned up in order to get funding and now is the time to get the right people on board to keep it that way.  Bankers, insurance, and other advisors are all going to be able to scale with you as you grow.

  3. Communicate with Investors.  

    Investors notice when you stop calling them after the check has cleared.  This is a bad thing for founders – especially those who are going to need to raise another round.  Future investors will contact first round investors during diligence and a good relationship is important – even more so if you hope to have follow-on rounds from your first funders.  Monthly reports including good and bad news, financials and metrics updates are a minimum.  It’s better to stay on top of the investor relationship and by communicating frequently, investors are more on-board with what’s happening.  Use a platform like Reportedly.co that allows you to see who has opened your messages and also allows investors to comment and offer help when needed.

  4. Balance Growth and Resources.

    You’ve been pitching your $100 million top line you expect in five years, but now it’s time to match your resources to your growth targets.  Grow too slowly and you’ll never raise another round (so you’d better hit break-even) and grow too fast and you’ll run out of cash before you hit the benchmarks for Series A and then game-over.  Perfect balance is what you need for venture success.

  5. Update your Exit Strategy (Goals and Contacts)  

    During your pitch everyone wanted to acquire you, but now it’s time to start executing on your Exit Strategy.  You should include the update in every board meeting and monthly update.  Start making contacts with those companies for whom you create value early on.  If they don’t know who you are, you’re not going to get the multiple offers you need for that 5X multiple you were lusting after.

  6. Metrics.

     Ok, you think you’re growing too fast to waste time on shit like metrics.  Fine – go ahead and be mediocre.  The best companies are crystal clear on what success looks like, how to measure it and what their goals are.  Without metrics, your team is mis-aligned, your investors are in the dark, and really – you haven’t got a clue about where you’re going.  You don’t have time not to do this.

  7. Strategic Plan

    It’s not set in stone, but without a roadmap you’re bound to get nowhere fast.  Companies without at least a lightweight two pager plan find themselves going through expensive pivots left and right to try to figure out what they could have done in the first place with a good planning process.  BTW, statistics say that after three pivots you’re out.

  8. Change from Tech Culture to Sales Culture.  

    So far, success has looked like getting your MVP launched.  You are three founders and a dog coding away in a basement somewhere, but now you need to change gears and become a sales and marketing company with a tech foundation.  Too many companies can’t get out of their tech roots and they keep on coding, but never figure out how to sell.  Break out of your comfort zone and start selling.

  9. Speed up.

     You’re on the clock now and capital is the most powerful accelerator out there.  You’ve got to code fast, sell fast, grow fast.  Companies that think they can continue on their old pace don’t get venture capital.  It’s a race against the clock with ROI multiples of 10X in five years, 25X in seven, there’s no time to waste and the slow starters won’t ever get to Series A.

  10. Investors are your partners.

     Now that the deal has closed, and all the negotiations are done, it’s time to tap into your investor base for help, connections and advice.  Keep them in the loop and engage them – they’re worth a lot more than just capital.

 

Good Luck

Post funding transformation is hard and unnatural for most founders.  Pay attention to your successful peers and remember that getting rounds of funding are not what this is all about – work towards creating a great, meaningful company with huge value for your exit partners!

 

 


Peter Adams is the Managing Director of the Rockies Venture Fund, 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.

Sexual harassment, gender based bias (both intentional and unintentional) have been a big part of Silicon Valley culture for years.  Women have struggled as startup CEOs to get funded, or as investors, to get into the top venture capital firms.  Those that did get in, often regretted it.  Silicon Valley is a cesspool of misogyny and it’s got to stop.

Simply criticizing the situation is going to get us nowhere.  While Silicon Valley is mired in inaction, the Colorado Startup Community is going strong in supporting women in venture capital and the revelation of Silicon Valley’s mis-steps, while distasteful, may finally lead to productive change.

There are four principles that Silicon Valley just doesn’t get, and Colorado venture community is going strong (but still with room for improvement).

Be Transparent

While the recent stories of Silicon Valley misogyny are disturbing, it’s important that these stories are daylighted to expose inappropriate behaviors and to punish those organizations that condone or acquiesce to them.  Colorado’s Foundry Group has published a Zero Tolerance Pledge on sexual harassment which represents a great commitment from a leading Venture Capital firm.  Transparency is the first step to change, but much more than awareness is needed to effect change.

Be Proactive

Massive cultural change supported by generations of beliefs, actions and misconceptions doesn’t happen all by itself.  Communities need to be proactive in causing change.  As an example, the Rockies Venture Club in Denver has consistently invested in about 50% women led companies, far more than the national average of just 13%.  The organization recognized that while its investments were gender balanced, its investor community was not and that just 12% of its 200+ investors were women.  Rockies Venture Club proactively founded the Women’s Investor Network, led by Barbara Bauer, in order to recruit, educate and engage women in angel investing.  In just a few months more than a dozen women had made their first angel investment.  RVC found that the way to make change happen was to be proactive and intentional in its actions, rather than just wishing for diversity.

Why aren’t female-founded businesses getting more VC money? For Julie Wainwright, founder and CEO of consignment website The RealReal, it comes down to the lack of female VCs. “When you have different businesses that aren’t proven that may appeal more to a female [customer], a female investor is going to be able to evaluate that” better than a male investor could, she says. “I think in general, most VCs are trying to do their jobs, but there are a lot of unconscious biases.”   (Fortune Most Powerful Women, 2017)

Start at the Foundation

Cultural change happens much more slowly than any of us would like.  Organizations like NCWIT have done an excellent job of showing how unconscious biases that are based on years of social conditioning can impact our decisions without our even knowing about them.  One way to combat those biases is to start at the foundation and create education programs for young entrepreneurs that create new ways of thinking about gender and leadership.  The BizGirls program is a CEO Accelerator for high school age girls that is designed to create empowerment and confidence in girls by providing them with leadership and entrepreneurship experiences that help to remove unconscious biases and empower girls to take on whatever challenges that their passions may lead them to.

Work on the Top – Board Representation

Corporate boards are slow to change and according to a Credit Suisse Report only 14.7% of corporate board seats are held by women.  This is a fairly astounding figure since it is well known that corporate boards with gender diversity outperform those populated by white males.  Colorado has begun an intentional process to increase the number of women on corporate boards led by the Women’s Chamber of Commerce and it’s Women’s Leadership Foundation’s Board Bound program.  The Women’s Investor Network in Colorado has also begun to create an on-line resource to connect women with opportunities to serve on angel and venture backed company boards, thus providing them with a stepping stone to public board service.

  Colorado’s collaborative and inclusive community leads to the kind of discussion and active participation that leads to continuous improvement.  Here in Colorado we hope that Silicon Valley can learn from us and begin to create a positive environment of inclusion and gender balance that will help lead companies and communities to success.

 

Women make up the fastest growing community of angel investors and it’s changing the face of Angel Capital for the better.

Angel groups like Rockies Venture Club have been beating national averages for investing in women and minority led companies with 54% of our portfolio consisting of women and minority led companies vs a national average of just 14%.  But in order to balance the ecosystem it’s important not just to invest in women led companies, but to engage women angels who can help mentor startups and who can gain experience serving on the board of directors of some of the startups they invest in, thus paving the way for increasing the number of women on corporate boards at all levels.

Research shows that companies with women on boards out perform those with no or few women.  Companies wit

RVC Women Investor Network

h the highest percentages of women on their boards outperform their less diverse peers by 66%.  We have certainly seen these trends in our portfolio companies and are committed to developing further diversity in our community.

We have launched the RVC Women’s Investors Network  (WIN), led by Barbara Bauer.  The network has had several well-attended events that focus on angel education and making connections.  The group is based on four principles that play on women’s strengths:

Engagement: Programs that allow people to work together and share wisdom of crowds to make good decisions and great investments.

Give Back: WIN members have years of business experience and they want to be more than just a check – they like to mentor and coach up and coming companies.

Act From Knowledge: Women like to understand the landscape before they jump in and invest.  No more “fake it until you make it” – that can cost thousands for new angel investors!

Education: Classes, workshops and “get to know an angel” events provide deep venture capital knowledge to get WIN members up and going quickly and confidently.

If you’re interested in engaging with the group, volunteering, or just learning more, consider attending the WIN Luncheon at the Angel Capital Summit, Tuesday March 21 on the DU Campus.

Click HERE to register

If you’re interested in learning more about Angel Investing and Venture Capital, you should definitely attend the full Angel Capital Summit.  Tuesday-Wednesday March 21-22 in Denver.

Click HERE for more information and to sign up.

Want to learn more about Rockies Venture Club?  Check us out at www.rockiesventureclub.org