Author Archives: Zach Shulman

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October 17, 2012

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Dealing with VCs, Startup Life

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Startup Company Valuations

I hosted a guest lecturer today named Doug Rowan at Johnson (for those of you not in the Cornell ecosystem, “Johnson” is how the marketing department likes us to refer to Cornell’s business school).  Doug is an older guy with lots of startup experience both as entrepreneur and investor.  He currently mentors a lot of companies at the “tiny” stage.

Doug’s lecture was on startup company valuations.  Here was his key takeaway:  the best way to look at valuations of seed or Series A companies is to consider the amount being raised and the fact that the investors will want to own between 20% – 35% of your company after they invest (assuming a priced equity round).  Period, the end.  Yeah, it is that simple.

So, you want to raise $500,000, well guess what, your pre-money valuation will be between $930,000 and $2mm.   You want to raise $1mm, then your pre-money valuation will be between $1.857mm and $4mm.  You want to raise $5mm (big first round), well just do the math.

[desired %] = (Amt to be raised)/(X+Amt to be raised)

Just put in the “desired %” and “Amt to be raised” and solve for X.  That is your pre-money (well at least one end of the range).   Doug’s view point is often right.

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October 10, 2012

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Dealing with VCs, Public Service Announcements

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Q3 2012 VC Fundraising Data and Conclusions

I have an unable to post anything original for the past 2 weeks….and this week is not going to break the streak.  But I did come across a super post today by Michael Greeley at Flybridge who reported on the just announced Q3 2012 VC fundraising data released by the National Venture Capital Association (NVCA) and Thomson Reuters.  I trust the NVCA data the most though there are a number of other sources.

Anyway, Michael’s piece is full of conclusions and facts and worth re-posting.  Here it is as a link and in full text:

“The National Venture Capital Association (NVCA) and Thomson Reuters released today the 3Q12 VC fundraising data, which is a report I eagerly await as it is a barometer of the health of the VC industry. And while 53 funds were raised – the largest number since 3Q11 – only $5.0BN was raised which continues the quarterly trend downwards since mid-2011; there was $6BN raised in 2Q12. Year-to-date VC’s have raised $16.2BN which suggests that for the full year VC’s will raise between $21-$23BN – not too shabby given the Great Recession and the generally uninspiring returns for the past decade across the industry. In all of 2011 VC’s raised $18.6BN. But it is what is beneath the headlines that I always find fascinating…

– No doubt the industry is shrinking (which over time will be very healthy for those firms that remain active) – year-to-date there was a 13% decline in the number of funds raised when compared to the same period in 2011

– But over that same year-to-date period the amount of capital in 2012 was up 31% when compared to the first nine months of 2011 – which included arguably the worst two quarters in recent memory (2Q11 and 3Q11) for VC fundraising

– Interestingly, of the 53 funds raised, only 16 were new funds (more on that later)

– If one considers NEA a Silicon Valley firm (I know they are headquartered in Baltimore but they have a very large and successful west coast practice), the top five funds raised are in San Francisco and represented 55% of the capital raised

– Nine of the top ten funds are in California; #10 (Pharos Capital) calls Dallas and Nashville home

– The average size of fund raised in 3Q12 was $94M, although the median was $160M

– This is more troubling – the average size of new first-time fund raised was $9M while the median was $2.5M (that is not a typo). In fact 19 of the 53 funds raised this past quarter were less than $5M in size

– The largest new first-time fund raised was by Forerunner Ventures ($42M) which ranked #22 of the 53 funds raised

– The largest fund raised in 3Q12 was the $950M growth fund raised by Sequoia Capital – the rich get richer!

So what is there to make of all this? While I expected more rapid contraction of the industry, the amount of consolidation at the top of the pyramid is dramatic. Arguably this implies a more challenging time for entrepreneurs as there continues to be fewer robust VC franchises available to them, and those that are active, will tend to be centered around San Francisco. On a more hopeful note though, VC returns have meaningfully improved in recent times so perhaps we may start to see over the next few quarters a greater fundraising pace across more firms – a trend well worth monitoring.

Michael Greeley is a managing director with Flybridge Capital Partners. Opinions expressed here are entirely his own; to view this post please visit his blog.“

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September 26, 2012

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Management, Startup Life

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Team, Team and Team

What is the secret to success at a startup?  I am convinced (and so are a lot of other people) that the team is the #1 success factor.  Trust among team members is a critical element.  The ability to argue productively is a critical element.  Respect among team members is a critical element.  Team issues account for most of the troubling days in my VC work.  Quoting Mike Moritz from Sequoia Capital, “Judging people is more difficult than judging a market or a product. Markets rarely deliver big surprises. People will always produce surprises.”

A CEO of one of the companies in our CVF portfolio today sent me a post entitled “What Makes a Great Cleantech Team”.  Check it out here.  It contains some conclusions based on what I would call semi-rigorous (not academia quality) research.  The summary, “Great founders hail from every age, background, and school. What differentiates winning teams is their relationships. Successful cleantech companies tend to be bands of brothers and sisters – including the core inventor – that come together on their own, form a complete team, and have a leader fit for the long haul. In contrast, here’s the recipe for a failure: Find an interesting technology, assemble a team of competent people around it who didn’t previously know one another, and don’t worry about bringing the original inventor along.”

I don’t think is at all limited to cleantech.

You will likely enjoy the post.  To me, the trust and respect among founders who know each other prior to starting a company is a huge leg up towards achieving success.

Not always easy to find the right people!

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September 22, 2012

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Public Service Announcements

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Guest Post – uJiiV: The New Social Calendar

Today a Cornell undergrad student asked me to post about her new startup company, which is based in Ithaca.  The email thread resulted in a guest post.  So, here is a guest post by Jacqueline Neves, a junior at Cornell about her new startup – check it out!  And if you would like to guest post, just let me know.  Thx.

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uJiiV: The New Social Calendar

The student, the professional, the parent. What do they have in common? Their busy lives. All of us keep multiple schedules whether we realize it or not. A work schedule and school calendar are obvious, but what about that football team who’s games you never miss? That’s a calendar you manage as well.

I am a junior at Cornell (Applied Economics and Management, 2014), and I’m the founder of a new internet startup called uJiiV.com. uJiiV.com, is a new social network based around the fact that we all manage multiple calendars, and how you can integrate those events with your Facebook and other social networks in order to better coordinate with friends and groups. Our site allows you to sync or subscribe to the calendars of your connections, allowing you to pull all your “calendars” into one location with ease. The idea is that when national organizations, such as pro sports teams, as well as your own circle of contacts have uJiiV accounts, you will be able to keep track of everything in your life with ease: work, school, family, travel and leisure. This summer I assembled a team and we have been building the site, which is nearing completion. And with a team that includes 16 Cornellians, we have been steaming right ahead in the development of the site and of the business.

We are planning a prototype launch for next week. And interestingly, this launch will double as an international debut because I am currently studying abroad in Cannes, France. While being 6 hours ahead of New York may seem like a hassle for a startup founder, things could not be going more smoothly. I am in constant contact with the team and we are right on track with the goals I set back in May. This not only shows the power of technology and why a site like uJiiV that allows you to connect with your circles of contacts easier is necessary in the digital age, but also the competence and skill of my team. In fact, the importance of surrounding yourself with a skilled team became clear to me within the first days of creating this venture. I have to say that I am proud of the progress we have all made so far.

For more information on uJiiV, see our informational video here:  http://www.youtube.com/watch?v=R9XiMJvHssc or contact me at jln57@cornell.edu.

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September 11, 2012

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Board of Directors, Dealing with VCs, Management, Startup Life

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Early Employee Dilution

I recently got a question from a person in a large company who is thinking about joining a startup that expects to raise venture capital.  Actually, I got many questions.  But here is one that I want to focus on in this post:

“Can I ask for undiluted stock (non dilution clause)?”

To use Brad Feld’s expression, this question kind of gave me a “vomit moment”.  The short answer is that no one should ever ask for this type of protection.  The longer answer is:

1.  I am not even sure what “undiluted stock” is, but safe to say the person (I will call him Exec X) meant stock that his equity would not be dilutable in terms of ownership.

2.  It is legally possible to grant non-dilution via a contractual right.  For example, let’s say Exec X is asking for 10% of the fully diluted cap table via a stock grant or option grant that is non-dilutable.  He is asking for 10% because he is joining as a high level officer like CEO or COO and he is a very early employee.  The company could grant Exec X a right to receive more stock (or more likely stock options to avoid tax issues) as the company issues additional equity in the future.  Those additional grants would prevent Exec X from being diluted.

3.  But, the problems with doing so are numerous.  First, it means that every time the company issues more equity, the other stockholders (most notably the founders) are going to be diluted again by this “non-dilution” issuance to Exec X.  So, the founders get diluted by the triggering equity issuance (like a financing) and then they are diluted again by Exec X’s non-dilution protection.  That is an untenable result and really stinks for the other shareholders.

4.  Second problem:  it raises a huge red flag for investors.  Not only will the investors ask why on earth did the founders grant Exec X such a right, but they will also ask why on earth did Exec X ask for such a right.   It will spook the investors.  They won’t (or should not) tolerate it and will end up making Exec X give up this right going forward.  Not a great way to start a relationship.

5.  Third problem:  the right given to Exec X gums up the company’s cap table.  New investors would have to build in the “non-dilution” shares into their valuation per share calculation.  This will create headaches and investors will not like dealing with it.

This is not to say that Exec X won’t ever get an additional equity issuance in the future.  For example, if the company raises lots of $$ and Exec X’s ownership drops to say 3% ownership over time, then the Board of the company would likely grant Exec X options to get him back to a “CEO level”, which is typically 6 – 8%.  It will all depend on Exec X’s performance.  For that matter the Board could also replace him……

Happy to entertain your questions.  Thanks.