Small Cities are Rockin’ for Startups

Tough for me not to jump on the bandwagon when I see an article on the benefits of launching a startup in a small city.

Here is a most recent example from Inc.  I agree with all 8 items listed, and I think Ithaca has 7 of the 8.  Ithaca has centers of excellence (primarily at Cornell and now also at Coltivare; we have REV; we have good business locations to rent (with more being built); we have a really smart available workforce due primarily to Cornell, Ithaca College and TC3; companies clearly make a big splash when they are successful or exit; we have a very well connected startup community thanks to many events and eship-oriented groups; and Ithaca does allow for plenty of “focus” time.  In my view, however, we could use more executive talent (so, all you seasoned execs, feel free to move here!).

In addition, one item not listed explicitly that I think should be on any list is that small cities are fabulous places to live and raise families.  Easier, cheaper, “kids camp for everything”, great outdoor attractions, no traffic, 5 minute commutes, etc.

In short, Ithaca rocks for startups (and do many other small cities, but I am a little biased!).

VC IQ Test – Have Fun!

I thought it might be interesting to pose a question and see who gets the right answer.  The facts leading up to the question are a little complex, but I think the question is an easy one.

Facts:  

1.  Company AB is an existing operating company that is doing well.  Company XY is also an existing operating company that is doing well.  Both AB and XY have venture investors.  AB and XY are in the same industry “Z”, but have complementary product offerings.

2.  Private equity firm LM wants to do a roll up of AB and XY to form a larger company with a broader range of product offerings in industry Z.

3.  The plan is for private equity firm LM to make an offer to buy company XY.  The structure of the offer is not irrelevant, but assume it would be a stock purchase.  LM’s offer would be made through company AB, so that it feels like LM/AB are making  the offer together with the end game being that AB’s management team would run the combined AB/XY company.

4.  To finance the offer, private equity firm LM would first make an equity cash investment in AB.  Then AB would use a big chunk of the investment cash to buy company XY.  Company XY’s stockholders would thus be cashed out (and hopefully happy).  At the end of the day, Company AB would own Company XY (they would likely do a legal merger) and the shareholders of Company AB, which now includes the private equity firm LM due to its equity investment in AB, own the combined companies.

5.  Let’s assume that private equity firm LM invested $22 million in company AB in step 4 above.  Let’s assume that $19 million of that is used to buy company XY (so $3 million of fresh cash is left in the combined company to fuel ongoing operations).

Question:  as an existing investor in company AB what is the #1 most important fact not disclosed above that I need to know to figure out whether or not I am in favor of this proposed deal?

Leave your answers in the comments.

Boards at Startups

I just came across a super series of easy to understand videos on startup boards of directors.  Brad Feld (Foundry Group) teamed up with the Kauffman Founders School and created about 35 minutes of content arranged in 7 relatively short video segments.  Brad wrote about this today is his own blog.

It is worth viewing for anyone that has a board of directors or is considering forming one (for those in the very very very early stages).   The videos are here on the Kauffman Founders School site.   In fact, the site contains links to video series on a number of relevant startup topics (finance, leadership, selling, marketing, etc.).  Easy viewing.

It is over 40 degrees and sunny here in Ithaca today.  I saw some students in shorts!

Revenue Model: The Path of Least Resistance

I have heard many times that if a startup company CEO cannot easily and quickly explain his/her pricing model to a customer that the startup company is doomed.  This probably applies to “non-startups” too.  In any event, I agree.

Related to pricing is how a company plans to make money off a customer.  The easy case – customer is buying a good or service and pays for it then and there.  Slightly more complicated – customer is buying a service and paying for it monthly (i.e., a SaaS revenue model).  Even more complicated – customer is paying based on use hurdles.  Regardless, the company better be able to easily explain the pricing structure to the customer.

We recently had a company in the CVF portfolio, GiveGab, that changed its pricing model.  And the change has been very well received so far (and we hope that will continue with major scaling).  The original model had the company implementing either (i) a SaaS model or a (ii) custom build model.  The custom build model was tough as it was being sold to larger organizations that move slowly.  The SaaS model was tough because many of the potential customers (non-profits) had previously used other SaaS software solutions (in this case for volunteer management) with a mixed bag of results.  GiveGab knew something had to change.

The answer in GiveGab’s case was the path of least resistance.  How about getting paid by the customer only when the customer gets paid?  In this case that meant a donation revenue model.  GiveGab’s customers pride themselves on cultivating volunteers.  This critically increases support (financial and otherwise) for the non-profit.  GiveGab came to understand this quickly and built in donation management into its volunteer management platform.  The message to the GiveGab customer was simple:  we have the best volunteer management system, we want you to use it for free and only pay us for donation processing (something that most non-profits do anyway).  This is a great approach.  The customer pays for a transaction that it is used to paying for already.  But it does so on a volunteer management system that is awesome.  A win-win all around!  The customer gets more and GiveGab gets scale.

Bottom line:  think about the path of least resistance when it comes to a revenue model.  Take that path if possible!