The Grind

The other day I was guest lecturing in a class and described running a startup to be like swimming in a Shawshank River.  There is a constant flow of problems building a company, but at the end might be salvation!

A friend of mine just sent me this cartoon, which has a different take on startup life.  Nothing revolutionary here, but I loved it so thought I would share.   If you don’t like the hamster wheel, start your own company!


startup vs corporate

Filling Out the Round

I like the practice of VCs giving term sheets that provide for a specific size for the total round and then stating how much the specific VC will contribute.  For example, “VC will serve as the lead investor up to $400,000; Company would source balance of the round up to $600,000 (so round size would be up to $1,000,000 in the aggregate).”

At the early stage, the founding team often has lots of “interest” lined up waiting for a lead.  I hear this often.  Well, the structure described above solves that problem.  And it also puts the founding team to the task – VC stepped up to lead so now go and fill out the round!

From my perspective this serves as a test for the founding team; and it is an important test.  It serves to validate their claim about having enough interest to fill out the round and also proves their ability to get that done.  Even after the lead investor steps up and provides a term sheet, getting remaining hard commitments is incredibly challenging and can take weeks or even months!

Another interesting point about making it clear that the founders (or subsequent management team) need to fill out the round is that it sets a tone for going forward fund raising responsibility.  I love to help our portfolio companies raise investment capital, but the buck stops with the management team – it is the team’s responsibility to raise capital.  Sometimes it seems that this responsibility never stops.  I like reinforcing from the earliest interaction that the management team (might be the founding team) of a VC backed company can never delegate the fund raising responsibility.  We (the VCs) can help, but the effort will fail if not led by the team.

Go raise some bucks!

Positive Energy

Positive Energy inside a startup is the critical asset to make things tick.  Building that Positive Energy is the job of the CEO and the senior team. Building comes in different forms.  I love this example of Positive Energy.  Fun, makes you smile, makes you think something is going right inside that company!  Makes you want to work there.

Go GiveGab!

Ithaca Has Arrived – Ithaca Tech Meetup

Last night the Ithaca startup community held one of its periodic Tech Meetups. It was by far the best one yet in my mind for the simple reason that there were a lot of engaged people there!  The energy in the room was incredible.  My VC partner Jennifer and I are really proud that CVF sponsors these events.  We were really thrilled with the conversations.  The event put a big smile on my face.

The quality of the event meant many things, but one stands out – no one can argue the point that Ithaca is a startup haven and one that is growing.  Yes, it could grow faster.  Yes, we need a few more big exits.  Yes, we need some more experienced entrepreneurs to transplant here (organic growth of top talent takes too long).  But, Ithaca is awesome and a key part of the upstate New York startup scene.  Ok, I am little biased.

Also, speaking of growing a startup community, the following posts recently published on Steve Blank’s blog are worth reading.  For me, the comparison of Bend, Oregon to Ithaca is dramatic.  Enjoy:

Bigger in Bend

Early Stage Regional Venture Funds

Engineering a Regional Tech Cluster

And here is another one from Brad Feld:

The Post Money of Your Series A is Not My Problem

I was giving some advice the other day on how to approach Series B investors in terms of valuation.  Here is the hypo (all $$ amounts changed):

1.  Company X raised its Series A at a pre-money valuation of $5mm and it raised $4mm dollars.

2.  So the post-money valuation after the Series A was $9mm.  And the Series A investors then owned 4/9s of Company X.

3.  The Series A round was taken by $2mm of institutional investors and $2mm of angel investors.

Easy facts, but note that because the Series A round was rather large compared to the pre-money valuation the resulting post-money valuation is substantial.

So now is the time to raise the Series B.  Company X has met its milestones.  It has received necessary approvals to sell its device.  It has built out the team.  It has just started to generate revenue.  The team is energized.  It expects revenue of $1.7 million in the coming year.

What should the pre-money valuation be for the Series B?  First of all, when receiving a pitch from an entrepreneur, I hate it when the slide deck has a bullet that says something like “we are raising our $5mm Series B at a pre-money valuation of $17mm”.  Last time I checked, the pre-money valuation was the #1 most negotiated term in a deal.  And you are now trying just to dictate it in a slide?  That makes no sense to me at all.  You might even be low balling yourself by accident.  I would much rather hear “we are raising our $5mm Series B and our pre-money valuation thinking is reasonable; and the next slide has a simple use of proceeds for the proposed raise.”   Now you have opened yourself up to a normal negotiation if in fact I am interested.

Second, and the real point of this post is that while the management team of Company X certainly wants the Series B to be at a higher pre-money valuation than the post-money valuation of the Series A, that in and of itself is rather irrelevant to the valuation discussion.   The fact that the Series A investors accepted to live with a post-money valuation of $9mm in this hypo does not mean that the pre-money of the Series B should be above that.

For example, in this hypo, Company X expects to do $1.7mm of revenue in the coming year.  Let’s assume that the Series B investors think that is reasonable.  The first question they are likely to ask or research (or both) is “what do companies in this space sell for stated as a multiple of revenue”.  I asked the Company X team this question and the response was “3X range”.  So, the Series B investor might take $1.7mm times 3 and get a number that is obviously less than the Series A post-money.  The gap is real.  And the arguments for the gap are valid.  “I hit every milestone,” says Company X so “how can we not be worth more than the Series A post-money?”   To which the Series B potential lead investor says “hey, your post-money is not my problem – why should I invest at higher revenue multiples than what the industry is seeing?  If I do, then I am taking a huge risk that my return will stink.”  Expect this discussion.

One good answer to this gap is that the Company X team must show the Series B investors that they are investing in the future of Company X (not just the next 12 months revenue) and can still make a great return (say 6X and above).  This is obviously true and works well if Company X does not anticipate needing another round of financing, expects to build the revenue ramp quickly and has good product margins.  But beware of the gap!

Lessons:  don’t try to dictate a pre-money valuation in a slide deck and don’t think that the Series B investors will care about your Series A post-money (and this applies to Series C looking at Series B post-money too…..obviously).  The best route to a high valuation is to get multiple term sheets….again obviously.