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White Paper Outlines Why Venture-backed Companies Should Not Rely Solely on Bulge Bracket Firms When Selecting IPO Underwriters

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With the upcoming Exit Strategies Workshop, this press release is a timely bit of research about how to go about selecting an underwriter for your IPO.  With IPOs becoming a possibility in Colorado again, as evidenced by recent offerings by Rally Software and Noodles, this is information we should all take into account when planning Angel and Venture Exits.

To learn more about planning for an exit strategy and why it’s important to have your exit planned before you raise your first round of Angel or Venture Investment, consider participating in the Exit Strategies Workshop on August 20th, hosted by Rockies Venture Club.

 

PRESS RELEASE

Aug. 1, 2013, 11:11 a.m. EDT

Keating White Paper Posits that Venture Capital-backed Companies Choose IPO Bookrunners Based on a Fatal Flaw

 

GREENWOOD VILLAGE, Colo., Aug 01, 2013 (BUSINESS WIRE) — Keating Investments, LLC, the investment adviser to Keating Capital, Inc. KIPO +1.67% , has released a new white paper titled “The Fatal Flaw in Underwriter Selection by Venture Capital-backed Companies: Why Issuers Should Not Rely Solely on Bulge Bracket Bookrunners.” The paper, authored by Timothy J. Keating, President of Keating Investments and CEO of Keating Capital, outlines the reasons that most venture capital-backed companies choose “all-star” IPO underwriters and why these underwriters often fail to produce all-star results.

Keating’s paper argues that it is human nature to assume that bigger is better, but that isn’t necessarily the case when venture capital-backed companies choose lead underwriters for their initial public offerings.

Mr. Keating states, “Just as was the case with the popular book/movie Moneyball, most venture capital-backed companies choose “all-star” IPO underwriters based on flawed premises that often fail to produce all-star results.

“We believe the same groupthink forces are at work regarding underwriter selection for venture capital-backed IPOs, the result of which is an effective oligopoly of three investment banks who, on a combined basis, have served as the lead left bookrunner on 59% of the 148 venture-backed IPOs that have been completed from January 1, 2010 to June 30, 2013 (venture-backed IPOs represented 30% of the total 499 IPOs during this 31/2-year period). This market concentration has contributed to sub-optimal outcomes for these issuers and, because of the central role that IPOs play in small business capital formation, causes distortions in capital allocation, and ultimately negatively impacts the returns to venture capital investors.”

The white paper provides a comprehensive overview of the price and non-price dimensions (prestige and analyst coverage) that issuers use in underwriter selection and outlines the “myths and realities” of analyst coverage which has led to a bookrunner oligopoly.

In the conclusion, the white paper argues that small-cap issuers should include non-bulge bracket firms as bookrunners and select a blend of underwriters after having carefully considered the following:

— Non-price dimensions of underwriter differentiation (prestige and analyst coverage)

— Risk of size misalignment between the market caps of venture-backed companies and the institutional sales, trading and research franchises of bulge bracket investment banks

— Risk of pseudo analyst coverage from all-star analysts who have a very high marginal cost to forego coverage of an existing name in favor of a new IPO stock

— Increasing trend in the rate of “unsuccessful” IPOs and the potential underlying causes

— Drain on management’s time imposed by the need to conduct a non-deal road show after the IPO in order to get the stock into the hands of its natural long-term owners

“After such careful consideration then, and only then, choose the bookrunners,” Mr. Keating concludes.

To download the entire white paper, go to http://keatingcapital.com/newsroom/white-papers/.

About Keating Investments, LLC and Keating Capital, Inc.

Keating Investments, LLC (www.KeatingInvestments.com) is a Greenwood Village, Colorado-based SEC registered investment adviser founded in 1997, and the investment adviser to Keating Capital, Inc. KIPO +1.67% . Keating Capital is a publicly traded Business Development Company that specializes in making pre-IPO investments in emerging growth companies that are committed to and capable of becoming public. Keating Capital provides investors with the ability to participate in a unique fund that allows its stockholders to share in the potential value accretion that we believe typically occurs once a company transforms from private to public status.

To be added to Keating Capital’s email distribution list to receive quarterly newsletters and other announcements, go to www.KeatingCapital.com/contact.

http://cts.businesswire.com/ct/CT?id=bwnews&sty=20130801006201r1&sid=cmtx6&distro=nx

SOURCE: Keating Investments, LLC

Using Warrants Helps to Close the Deal

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Investors are always concerned about balancing risk with potential rewards when making angel investments.  Recently P2Bi was able to close their deal quickly by adding warrants as a “sweetener” to the deal for early first round equity investors, resulting in a quick close to their deal minimum and the early round warrant deal closes on August 8th.  

The Deal

Early investors who committed to the first round of P2Bi’s Series A funding received warrants for up to 50% of their investment amount with half expiring in December 2013 and the other half expiring in June 2014.  The warrants allow the investors to purchase additional shares at the original offering price of $1.50.

So, what does this look like to an individual investor? 

Someone investing $50,000 would have the option to purchase up to $25,000 worth of additional shares at the original offering price of $1.50 up to December 2013, or if that was not exercised, they could purchase up to $12,500 worth of shares by June 2014.

Why is this beneficial? 

In every deal there is an execution risk.  The deal looks great, but investors wonder how the company will do once the investment has been made.  The warrants allow investors to observe how well the company performs against its benchmarks and to decide whether they want to make an additional investment at the same rate once the company proves itself and the risks are reduced.  This is always attractive to an investor since later stage funding rounds where risk is substantially reduced typically will have a price that is as much as double or triple the original investment cost per share.

For more information about how this deal was structured you can contact Bruce Morgan at P2Bi (bmorgan@p2bi.com)

Technology Talent Shortage: Is the solution education, immigration or recruiting women?

Technology Talent Shortage:  Is the solution education, immigration or recruiting women?

tech picAttend any tech event in Colorado and you’re sure to walk away with the impression that there is a huge tech talent shortage here.  Even though the startup scene here is collaborative and cordial, things can get competitive when companies are looking to recruit talent.

In a time of high unemployment, how do we explain this shortage of tech talent?  One thing we know is that the shortage is not limited to Colorado – I am hearing of shortages all around the country.

Some people think that the issue is that we are not turning out enough educated people to fill these positions, yet according to research by the Economic Policy Institute, “For every two students that U.S. colleges graduate with STEM degrees (science, technology, engineering, and mathematics), only one is hired into a STEM job.”   At issue may be not that we are not turning out enough graduates, but that they aren’t graduating with the skills that they need to succeed in the job market.  In fact, the Economic Policy Institute reports that only about a third of the IT workforce has an IT-related college degree, 36 percent of IT workers do not hold a college degree at all and only 24 percent of IT workers have a four-year computer science or math degree, so maybe college education isn’t the answer.

Are programs like Galvanize G-School that focus on quickly educating people in real-world application development taking over and producing more cost effective workers?  The G-School guarantees a $60,000 job within three months of graduation or they’ll give your tuition back.  That’s a pretty confident offer – especially since the tuition is $20,000.  That’s a lot to give back in a refund, but it’s about a tenth of the cost of pursuing a full time private college education these days, and the job prospects are better, so I predict we’ll be seeing more programs like this in the future.

Is there really a shortage of skilled labor, or is it an economic issue? 

Another way of looking at the issue may be that there are plenty of skilled people in the US, but that there are better opportunities outside of IT that may be more attractive.  When U.S. talent is not actively entering the tech job market, the international market jumps in to fill the gap. Here are some interesting statistics (also from the Economic Policy Institute):

1)      The annual number of computer science graduates doubled between 1998 and 2004, and is currently over 50 percent higher than its 1998 level, so we’re turning out lots of grads.

2)      Immigration policies that facilitate large flows of guestworkers will supply labor at wages that are too low to induce significant increases in supply from the domestic workforce.

3)      Immigrant worker visas have more than doubled since 1998.

4)      52.7% of STEM graduates who do not pursue technology careers cite pay, promotion and working conditions as their reasons for pursuing work in other areas.

5)      Computer programmer salaries have remained relatively flat in real terms between 1994 and 2010.

These statistics would lead one to believe that immigrant workers are taking all the IT jobs, but on-the-ground experience doesn’t seem to support this, at least in Colorado where we’re seeing high demand and relatively high wages for developers.  The statistics suggest that all or most sufficiently trained U.S. workers are getting work in tech if they want it and that international labor is filling the gaps while also holding down wages in a Thomas Friedman-like flattening of wages globally for similar work.

What about women in tech?

Here’s the big secret in growing the tech labor force – hire women.

Well – if you can get them, it’s great for business.  Tech companies with women have been shown to use 40 percent less capital and be more likely to survive the transition from startup to established company. (From Cindy Padnos, Illuminate Ventures: “High Performance Entrepreneurs: Women in High-Tech,” 2010.)  Nationally, the Department of Labor estimates that our economy will add 1.4 million technology-related jobs to the workforce by 2020; however, at current graduation rates, we’ll produce only enough qualified candidates to fill a third of these jobs. In Colorado, there will be about 4 tech jobs for every 1 graduate with a bachelor’s degree in computing.  Recruiting more women to IT programs can at least double the amount of available talent.

Here are some interesting numbers from the bureau of Labor Statistics. (Department of Labor Bureau of Labor Statistics, Current Population Survey, 2012; Dow Jones VentureSource, 2012)

  • 26% of U.S. technology jobs are held by women
  • 20% of U.S. software developers are women
  • 11% of executives at U.S. venture-backed startups are women

Conclusions – if you’ve got a tech labor shortage, then you need to address all three areas.  Educate your workforce to be able to do the jobs we need to get done regardless of whether it’s a four year or master’s degree or a six month program.   Continue to recruit international labor to fill job gaps.  Think about how many foreign students who earn masters and PhD degrees that we’re sending back home and consider where to prioritize immigration policy.  Educate, recruit, hire and retain a diverse workforce with gender equality to improve performance and meet talent needs.

To learn more about technology investing, staffing and education in Colorado and around the country, consider attending Rocky Venture Club’s “Investing in Tech Companies” event coming up next Tuesday, July 9th in Denver. Register for Investing In Tech Companies event

 

Are all startups “tech companies”?

tech picSometimes it seems as though all startups are tech companies.  When they are in early stages, we talk about “technology risk”, even if that means figuring out how to outsource your supply chain and get your product manufactured overseas by someone else.  It’s not really “technology”, especially if the item is something that is being sewn or otherwise assembled by hand.  We talk about technology risk in the sense that every company has to figure out how to make and deliver whatever product or service it sells. 

In the original Greek root “techne” is about making stuff.  It refers to craft or art, so it makes sense that every company has to make something, even if what it makes is Intellectual Property or a service that can’t necessarily be held in your hand.

Another reason people seem to think that every company is a tech company these days is that you pretty much can’t start a company without using a lot of technology to do it.  Regardless of whether you have programmers setting up an e-commerce site or creating a SaaS application, you’re likely to be using technology in setting up and running your company.  Those companies that don’t use technology probably won’t have the ability to scale and grow big in the way that Angel and VC investors are going to demand.  Since Rockies Venture Club only deals with companies that can scale and provide a significant return to our investors, we don’t see a lot of non-tech companies.

Some people have argued that no companies are really tech companies any more.  Everyone uses technology to create and deliver their product or service, so it’s no longer informative to distinguish some companies as tech companies and others as non-tech.  The real company behind the technology may be providing banking or financial services, wayfinding on your iPhone, tracking your workouts and fitness levels, providing entertainment through games or graphics and so on.  Even though your company may be a SaaS (software as a service) tech company, ultimately it’s probably providing a non-tech service to someone.

A lot of the companies we look at are healthcare tech companies.  These companies are either dealing in healthcare IT where they are providing some kind of information or communications system to make healthcare delivery more efficient, or they have some new technology to deliver drugs, dispose of toxic waste, or other healthcare related operations.  Are these “tech companies” in the same way that IBM is?  Probably not, yet we still call them tech companies.

Ok, so are ALL venture class startup companies tech companies or are NONE of them tech companies?  When it comes down to venture capital and how decisions are made, the fact that a company is a tech company or not really doesn’t matter.  VCs have expertise in highly specific areas, so if you have an IT data storage company (tech company) that will be of interest to certain types of investors whereas if you have an e-commerce company, that may appeal to others.  Within the realm of “tech companies” e-commerce used to be big prior to 2001 and now it constitutes just about 4% of VC investment.  SaaS and other tech fields have eclipsed this number and comprise the bulk of VC investment these days.  So my conclusion is that it doesn’t much matter any more whether you have a”tech” company or not, it matters what you do and who is interested in investing in that.

To learn more about technology investing, staffing and education in Colorado and around the country, consider attending Rocky Venture Club’s “Investing in Tech Companies” event coming up next Tuesday, July 9th in Denver.  Register for Investing In Tech Companies eventhttp://rockiesventureclub.wildapricot.org/Default.aspx?pageId=1349467&eventId=698722&EventViewMode=EventDetails

What alternatives do you have when banks can’t or won’t lend you money?

There are still lots of options available and one is “alternative lending.”  There are several types of alternative lending options available and one is the Cash Flow Loan.

Cash flow loans work by setting your line of credit based on your monthly revenues.  If your company does $100,000 per month in business, then the cash flow lender may give you a 1x line, meaning that they will lend up to one time your monthly sales, $100,000 in this case.  Your payments are made by EFT withdrawal on a daily basis.

In some cases such as companies with recurring revenue like SaaS companies, the multiple may be as high as 5x monthly revenue.  Recurring revenue commands a higher multiple because the streams of cash flow are more reliable than one-off sales that many companies have.

Cash flow loans carry a higher interest rate than a normal banking loan, but they can be a good alternative to selling equity in your company which is pretty expensive in the long run.  Some companies may use cash flow loans as a part of their valuation strategy to get themselves past key milestones to the point where they can raise equity at a higher valuation than they could have without that growth.

Come meet Jon Engleking from Guppy Tank, an alternative lender, at the RVC Banking Strategies for Startups event Tuesday evening June 11th from 5:00-7:30.  We will have great networking, lots of angel investors in attendance, a panel with commercial banking, venture banking and alternative lending viewpoints.Register for Banking Strategies for Startups

http://rockiesventureclub.wildapricot.org/Default.aspx?pageId=1349467&eventId=696972&EventViewMode=EventDetails

What is the difference between a “venture bank” and a regular “business bank”?

You may be familiar with the typical business bank. Names like Vectra Bank, Wells Fargo, Chase or KeyBank may come to mind. These banks loan money based on your demonstrated ability to pay them back with interest out of current cash flows. There are many options these banks use including lines of credit, overdraft protection, SBA loans and more.

Venture Banks are a unique type of bank that offer services primarily to venture capital backed firms. Silicon Valley Bank and Square 1 Bank are two great examples.  They get most of their clients through venture capital deals and VCs often make having a relationship with a venture bank part of their investment requirements. Venture banks serve venture backed companies that may not yet have sufficient cash flow to service a traditional loan. They build upon the relationship that the company has with its VCs and make loans for equipment, accounts receivable or other purposes.

Venture banks also differ from traditional business banks because they will typically have warrants for the purchase of stock in addition to a traditional interest rate. Warrants allow the venture bank to be compensated for their risk by sharing in the upside their companies enjoy when they have an IPO or are acquired by a larger company.

To learn more about venture banking and business banking and what they have to offer, and to meet some of the leading venture and business bankers in Colorado, be sure to attend the Rockies Venture Club “Banking Strategies for Startups” event Tuesday June 11th at 5:00. Register for Angel Capital Summit 2013

Valuation for Early Stage Companies

RVC Academy: Valuation of early stage companies

workshop to learn how to price early stage companies

by Thought Leader: Peter Adams, MBA

Executive Director, Rockies Venture Club

Free to Keystone Members

  • Tuesday, May 28, 2013  5:00 PM – 7:30 PM
  • Shift Workspaces 383 Corona St. Denver CO, 80218


Register

This class is designed for both investorand entrepreneurs to learn valuation side by side.

  • How can you assign value to a company with no income and no assets?
  • Does discounting future value work?
  • What is the role of risk quantification in early stage valuation.
  • Find out how an inflated valuation can deflate a company.
  • Learn how to use valuation methodologies for negotiation.
  • How to make valuation a “transparent” process, even when all parties don’t agree.
  • Learn FOUR different valuation methodologies you can use for early stage companies.

Meet and learn with other Rockies Venture Club participants in a relaxed environment. We will enjoy refreshments while we outline the tricky topic of valuation.

Includes a FREE one week subscription to ValuSource on-line business valuation tool $147.00 value.

http://www.valusource.com/Products/BusinessStakeholders.aspx

BizGirls Camp Open House This Week

BizGirls CampBizGirls Open House is this week as a part of Boulder Startup Week. Come visit Thursday evening 5:30-7:00 at the Boulder YWCA and hear Colorado School of Mines professor Joy Godesiabois speak about her research recently published in BusinessWeek about how Venture Firms that fund companies with women CEOs do better than the rest. We will also have Patty Laushman talking about her leadership lessons when she was thrust into a leadership role in her startup company.

BizGirls Camp is a one week leadership and entrepreneurship program for high school age girls. Each girl founds her own e-commerce company and as CEO guides decisions about marketing, brand, product, pricing, supply chain and finance. Girls receive ongoing mentorship after the camp from local women CEOs and entrepreneurs who help the girls grow their companies.

Register Here (Free)

Redesigning the RVC brandmark

Guest post by Yuta Okkotsu, Principal at Okkotsu Design

In 2012, when Peter Adams and Nicole Gravagna took over RVC, they envisioned a modernized version of the historic Denver angel investor club. Along with the addition of classes, closed-door investor meetings, and entrepreneur support meetings, the duo decided that they needed to update the branding and the logo for Rockies Venture Club to reflect the big changes.

Brandmarks (logos) are visual representations of organizations, from small individually-run websites to large international corporations alike. The essence of the brand is represented by the emotional, conscious, and subconscious connections that one makes with the brandmark. If these connections are positive, it can lead to long-term brand loyalty.

 

 

When I was asked to redesign the RVC brandmark, I considered several important parameters.

They were:

  1. to introduce a new take on the Rockies Venture Club brand using similar colors and themes
  2. to make it easily recognizable
  3. to best represent the younger generation of startup/biotech/small businesses in the state of Colorado
  4. and to preserve the familiarity that previous clients of the 28-year old organization has had.

 

What resulted was the new RVC brandmark in use today:

 

At the same time, I designed was the greyscale version that is less commonly seen:

 

I enjoy studying corporate brand marks and incorporating the ideas I get from them into design work. There’s deliberation in color choice, shapes, negative space within the shapes, font, and the context in which it is presented. When properly designed and used, these qualities will help distinguish the brand from others to reach a broad audience.

While the redesign in the brandmark was an important factor for the revitalization of the Rockies Venture Club in the past year, logos by themselves do not and cannot define a brand. Logos, after all, serve to communicate the brand quickly and effectively. Real change, as seen by Rockies Venture Club’s transformation, happens internally, and the new brandmark is a reflection of that change.