Answering the question “What do I need to know about investing in a startup?”

Once in a while I get the question “What do I need to know about investing in a startup?”   The context is typically where Friend A has asked Friend B to invest in Friend A’s startup business.  Then Friend B asks me the question.  This happens multiple times a year.

It is a fair question.  And one that is hard to answer definitively.  But, here are some basic things that I would recommend to Friend B to start with:

  1.  How much is Friend A looking to raise in total?  Let’s pretend the target raise is $750,000.
  2.  Is there a minimum amount needed to “close” the round of financing.  This is a critical question.  If Friend B wants to invest $25,000, then there better be some larger minimum amount going into to the company at the first closing.  If Friend A took $25,000 from Friend B and nothing else, then Friend B has most likely just flushed $$ down the toilet.  The company will be out of business as soon as the $25,000 is spent.  So, in this made up scenario, Friend B should insist on a minimum closing amount that gives Friend A’s company at least 6 months (and ideally longer) of runway.
  3. Can Friend A produce a projection model?  Does the projection model make sense?  Does the projection model actually show how the funds being raised will be spent (in other words an understandable “use of proceeds”)?   We all know that startup projections are essentially best guesses, but the model needs to tell a realistic narrative.
  4. Why type of legal entity does Friend A have set up?  Typically will be either a corporation or LLC.  BTW, I have a strong bias towards corporations when it comes to startups raising $$.
  5.  What type of security is being sold?  Typically will either be convertible debt or preferred stock (Series Seed or Series A).  And does Friend B understand the terms of the security and the deal?
  6. Does Friend B know much about Friend A’s business and does Friend B truly trust Friend A?
  7.  Finally, is Friend B ready to lose $25,000?  Key question!

This is literally the tip of the iceberg.  Please add your thoughts in the comments.   Thanks.

State of Startups 2016

First Round Capital just released its State of Startups 2016.  It is chock full of interesting stuff!  No need for me to recap it here.  Just view it for yourself.  Here is the link.  Thanks!

PS:  2 prominent team members at First Round Capital are Cornellians (Bill Trenchard and Howard Morgan)!

Make a Donation to UVC

Warning:  this is a non-profit fund raising email!

I am on the board of Upstate Venture Connect (UVC).   UVC is a non-profit focused on helping build the upstate NY startup community.  Among other things, UVC (i) connects people via events and newsletters, (ii) helps groups create seed/angel funds, which then invest in NYS companies, and (iii) maintains an ecosystem map and calendar.

As you plan your year end giving, please consider UVC.  It is worth the support.  All donations are fully tax deductible.

I have set up a simple way to give via GiveGab (yes, GiveGab is a CVF portfolio company).  Here is the link.   Thanks in advance!

Upstate Venture CEO Survey

I am on the board of a non-profit called Upstate Venture Connect.  Nasir Ali, a good friend of mine, heads the organization.  Here is a guest post from Nasir sharing summary findings from a recently completely survey of upstate NY CEOs.  Enjoy!

Seeds of Growth are All Around Us

This year’s Global Entrepreneurship Week follows an election season where economic anxiety weighed heavily on American voters.  Nearly a decade of research from the Kauffman Foundation and other sources has confirmed that young, high-growth businesses create almost all the net new jobs. While Upstate NY leaders were busy trying to save (or attract) industrial era giants, a new generation of world-beating founders grew up in our midst, then left to launch companies like Android, airbnb, Priceline, Nvidia, etc. in more startup friendly communities.

As the head of Upstate Venture Connect (uvc.org), I am committed to building Upstate NY’s startup ecosystem. I meet incredibly talented and ambitious founders in every part of Upstate, proof that our region continues to produce high growth entrepreneurs. Yet, these emerging companies are still invisible in their home communities and business leaders and policymakers miss their economic impact.

This fall, UVC commissioned Rochester based Center for Governmental Research to conduct the first ever Upstate Venture CEO Survey. We wanted to hear from high growth founders and, in one month, 115 CEOs responded. Half of the companies were less than 6 years old and nearly all (90%) were targeting national/global customers. Below are three key findings from the survey and their implications for UVC and other Upstate NY ecosystem builders.

High growth companies are everywhere and disrupting everything.  The 115 respondents fall into 47 different industry codes. Our future is not going to be a single cluster per city, but a super-regional community that values and encourages out of the box thinking and a fast growth orientation. Emerging founders today often have peers that are a few highway exits away instead of being across the street.

High-paying jobs are available, especially for college graduates. Seventy-five percent of companies paid workers more than $40,000 on average. Forty percent reported an average payroll of more than $75,000/year. Three out of four companies said that 80% of their staff holds college degrees.

The economic impact is significant and growing: Taken together, the firms account for 4,700 direct jobs (70% in NY) and 4,400 additional jobs creating more than $450 million in annual wages for NYS. When asked for five year projections, the CEOs collectively are planning to add 9,600 direct jobs. If these jobs are in NYS, there could be as many as 12,800 new jobs created with $1.4 billion in payroll.

The data clearly shows that the seeds of growth are all around us. That is why UVC is doubling down on its efforts to raise awareness of the intrepid founders creating a path to the future. In the year to come, we will be highlighting the most exciting companies in each Upstate community via our online Ecosystem Map, Events Calendar, UNY Pulse e-newsletter and blog/social media activity. We will also continue to work with leaders in each community to form new angel investment funds, accelerate the growth of existing businesses, and showcase entrepreneurial career opportunities for ambitious and talented college grads.

To see how you can play a role in building Upstate NY’s new economy, please visit http://uvc.org and join our growing network of startup founders and supporters today. The full survey report and summary data can be viewed and downloaded at http://uvc.org/upstate-venture-ceo-report/.

New Podcast – Public Service Announcement

A colleague of mine recently told me about a new podcast called “How I Built This”.  It goes into the stories of famous entrepreneurs and innovators.  Guy Raz (well known radio host at National Public Radio) interviews founders, etc., and turns the interviews into compelling ~30 minutes narratives.  GREAT for car rides.  I just drove home from Maryland and listened to about 5 of them.  I think my 14 year old daughter even enjoyed.  I forced her to listen to one so she would better understand what I do with startups.

GREAT stories.  Enjoy.  Available on iTunes, etc.