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.

 

 

VCs who Blog

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

 

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

 

Investor Pitch Deck Series #5 – The Problem Slide

Dear reader,

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

Posts in this series

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

 


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


 

The Problem Slide

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

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

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

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

 


Cringe Factors

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

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

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

 

Cringe Factor #2 – The problem is oddly specific

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

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

 

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

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

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

 

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

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

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

 


 

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

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

 

 

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

 

The Very Basics of Anti-dilution in Early Stage Financing

First Post by Sara Rodriguez-Lopez

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

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

Anti-dilution, now that’s tricky stuff!

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

 

What is dilution?

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

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

 

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

There are two main formulas:

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

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

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

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

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

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

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

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

 

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

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

 

Is there something else that helps reducing the dilution risk?

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

 

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

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

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

Guys, let’s work together!!

 

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

 

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

Erik Mitisek is new CEO of CTA

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

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

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

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

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

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

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

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

More coverage here:

 

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