2014 in Review of IthacaVC

The WordPress.com stats helper monkeys prepared a 2014 annual report for this blog.  Check it out.  Nothing earth shattering – just some fun and interesting facts.

Here’s an excerpt:

The concert hall at the Sydney Opera House holds 2,700 people. This blog was viewed about 13,000 times in 2014. If it were a concert at Sydney Opera House, it would take about 5 sold-out performances for that many people to see it.

Click here to see the complete report.

Here’s to 2015!!  Enjoy the rest of your holiday.


Ithaca Ranks #1

Happy Holidays everyone!

So, I don’t know much about the American Institute for Economic Research, but it just ranked Ithaca as the #1 college town in the USA.  And the main reason certainly resonates with me:  “This town in upstate New York ranked first for a number of reasons: Ithaca ranks number one in entrepreneurial activity and research and development, while also having a high number of college-educated people.”

Entrepreneurial activity and R&D!!  Great combination.  I am not sure how they measure entrepreneurial activity, but I will try to find out.

Here is the full ranking.

Enjoy the season!

Startup Valuations – Again…..

I have written about startup valuations previously.  Here is a post from October 2012.  And here is a post from November 2012.  And…..here is a post from July 2013.

This morning I was reading one of my favorite daily compilations of articles (called Innovation Daily, subscribe here) and came across another great short article on startup valuations called “Seed Rounds:  How to Pick a Valuation“.  Joseph Walla, who I don’t know, wrote it.  I liked it so much that I am re-posting it here (but probably better just to click the link above).

If you are advising startup founders, I strongly suggest having them read all 4 of the posts to get the lay of the startup valuation land.  Thanks!

Here is Walla’s post:

I can’t tell you how many times I’ve had this conversation. A founder is about to raise their first round and asking me how to value their company. [1]

There’s a reason it’s so difficult to figure out – valuations have little basis in reality for early stage companies. You evaluate the team, product, market and other variables – then, make a general guess.

Before I go on, if you read nothing else, read this:

Your #1 goals is to get your company funded, so you can build a big business. Funding lets you invest in growing your company faster than revenue growth would normally allow. Do what you can to get your company funded and get back to work generating value.

Here are some ways to value your company:

1. Market size

A big market determines the upside potential. In a world where only the 1000x companies make back portfolios, this is really important. [2]  This can often justify a higher valuations – and for good reason. For some investors, this is the most important attribute and they won’t invest unless it’s a huge market.

2. Revenue

Revenue is how traditional businesses get valued. Early stage companies often don’t have revenue or have revenue so low, it’s not a real indicator of future potential. Companies like Facebook and Twitter didn’t figure out revenue for a long time. This is the main reason the process of picking a valuation can feel so ambiguous. With that said, if you have revenue, this is something you should emphasize.

3. Month on month (MoM) growth

To become a big company, you need high MoM growth for years (PG: Startups = Growth). 20% MoM growth is the gold standard – the longer and more consistent you hit high MoM growth, the better. Even a product an investor doesn’t fully understand – for example, an app that self-destructs the photos it shares – starts to look really good with high MoM growth. This works for revenue or active users.

4. Active users

Free, engaged users are a proxy for revenue, as long as you understand when a free user is valuable and when it isn’t. The threshold is generally higher for consumer startups (Ten million users is the new one million). Moreover, the engagement of your paid users are also important, even though they’re paying you, since it’s a leading indicator of churn.

5. Team

Everyone talks about the Stanford / MIT teams. It certainly can help boost a valuation, but isn’t necessary. Domain expertise can also help.

6. Valuations of other companies like you

Relationally, you can compare your valuation to other companies on Angellist, Y Combinator, 500 Startups or elsewhere.

7. Acquisitions of other companies like you

This is helpful in determining a valuation, since it shows real liquidity for what companies will pay for a company like you, instead of what an investor will pay to invest.

8. Raising momentum / high demand

This method of valuing a company is further from reality than most attributes. If your company is in high demand, it drives the potential valuation up. Hopefully, it’s in high demand for good reasons, otherwise you risk a down round in the future.

9. Accelerator

Being part of an accelerator can help your valuation, since you’ve at least been partially vetted, which decreases some, but definitely not all, of the risk.

Things to note about valuation:

1. Your outcome will likely be binary

I spoke to a YC class about fundraising a few years ago and I still believe this – I’d rather raise $1m at a lower cap than $100k at a higher cap. The former will get us to the next stage as a company. The latter won’t be enough money to grow and without the capital to grow, could risk failing or a down round.

2. The valuation only exists if investors validate it

Traditionally, there’s a lead investor that validates a valuation, but a lot of companies now raise without a lead. By getting a few investors to buy in at a specific valuation, they’re effectively validating the amount. Either way, your valuation doesn’t truly exist until it’s validated.

3. Don’t risk a down round

A down round happens when the valuation of your next round is less than your current round. No one comes away from that undamaged. That can happen when people are too aggressive about their valuation in that first round. Don’t let that be you.

4. Terms often matter more than the valuation

For a higher valuation, you may be giving up some control, like a board seat. I’ve also seen people raise on 2x+ pro-rata, which means that the investor has the option of doubling their stake in the following round, which I think is generally a bad idea. I’d keep your terms as clean and standard as possible. [3]

5. Valuation pride

Why do people push super high valuations? It’s one of the few moments in your company’s history where you can get a stamp of validation. Just like good grades or good schools help drive your self-worth, a great valuation can do that too. It’s something you can tell others or use to compare. So, the bigger the stamp, the more likely you’re seemingly doing well. Don’t be tempted by this.

6. Map out multiple stages of financing

Take a moment and project out your equity over multiple rounds of financing. You need to make sure there’s enough equity to sell, while keeping enough equity for the founders and team. I hear of companies that sell 50% of their company for a few hundred thousands dollars. That won’t leave enough equity to sell for future financing rounds. (The Benefits of Building a Company in the Bay Area)

7. Drive for a ‘fair’ valuation

That probably depends a lot per company, but I kept that word in my head as I figured everything out.

8. Make sure your valuation doesn’t exclude great investors

Even though it’s hard to know an investor’s value add in advance, make sure you’re not picking a valuation that prevents great investors from investing (Investors and advisors: the crowd, the ringside, and your corner). Note, if it’s a great company, not all great investors will walk away from a high valuation (Sam Altman: Upside risk).

9. Be nice

Invariably, you’ll run into investors that think your valuation is too high. The only right behavior is to be consistently nice and explain your thought process (Treat investors well when fundraising).

10. Valuation versus percentage ownership

Some investors are more interested in the percentage of the company they own, versus the valuation. In that way, you might end up with a higher valuation than you would have had otherwise. You can certainly take this approach to picking a valuation, but just make sure you’ll be able to at least grow into that valuation – preferably grow significantly past it – by the time you raise your next round.

You’ve probably noticed at this point that there’s no clean formula. Even though it’s inexact, investors will want to know the thought process behind the valuation you pick.

Certainly, there are bad valuations, but there’s a larger range of gradations of good valuations and I wouldn’t stress about small differences between the gradations in the good range.

Good luck figuring this out. The key is to not spend too much time thinking about it. Some incredible companies, like Dropbox and Airbnb, got valuations that would seem extremely low in this market for their first rounds.

In the end, it’s your ability to execute that will turn your company into a big one – not your valuation. It’s more important to close the round, get the money in the bank and get back to building.

Would love to hear what you’ve learned about valuing early stage companies in the comments.

[1] This is mainly about your first round. I think a lot of the lessons can apply to later rounds though.

[2] Articles on needing the companies with 1000x returns to justify your portfolio:
Black swans
Upside risk

[3] YC has standard docs you can use

Cornell Tech Company: Agronomic Technology Corp (Part 2), Guest Post by Deb Eichten

Here is Part 2 of the post on Agronomic Technology Corp, continuing the interview that Deb Eichten did with the ATC management team.  Thanks!

From Licensing the Technology to Striving for Market Dominance:

Part 2 of 2 part posting by guest blogger Debra Eichten, Entrepreneurship at Cornell staff, interview with the founders of Agronomic Technology.

[EaC}: How did adapt-N transition from Cornell research to commercialization?  What was the process for licensing of the technology?

[Steve Silbulkin, CEO Agronomic Technology Group ]:  “From a very early stage we very confident that there was alignment and that we would land on an arrangement.”

[Harold van Es, Cornell Professor  and Chair of CALS Department of Crop and Soil Sciences]CCTEC worked primarily with Greg and Steve, but CCTEC brought me in and asked, “What do you want to get out of this?”  …One of the key aspects was that this is good for the farmers and good for the environment.  There was a sense that this came out of the Cornell Cooperative Extension system, there was a public benefit to the technology which was well accommodated.”

[Steve]: “There are a number of factors which were important during our discussions like keeping the science and commercialization coordinated but separate; that we don’t bias the science.  That was important to all the parties.”

[Greg Levow, President & COO, Agronomic Technology Group]:  “We were negotiating licensing before we had developed the full business plan which was just a necessity based on the timing.  You know, startups move so quickly, reiterate continually and you need a very structured licensing but you also need a very flexible company and that made the process very challenging because in our particular case this is a completely new thing.”

EaC:  Analysis of big data leading to more sustainable solutions is clearly the direction the industry is moving. How has having DuPont and Monsanto entering the market with competing products affected your business strategy?

[Steve]  “When Greg and I entered into this process, those competitors were not there.  There was an idea they would be there but it was not manifested.  Their presence doesn’t hurt us.  When you think about it, the presence of competitors helps create a category for our user. We are having a conversation about computational methods for nutrient recommendations.”

[EaC] What impact has the presence of competitors entering the market had on your ability to attract investors?

[Harold] “We clearly pioneered the technology. Once DuPont & Monsanto came into the market, this is no longer perceived as a little cooperative extension project or small startup business, this is a juggernaut. It has offered a lot of credibility to the technology.”

[Steve]  “They certainly created more exposure for us. It is also very helpful to our fund-raising process. Prior to competitors making announcements, we spent a lot of time convincing investors that adapt-N was a valid solution to real problems… [The competitors] have also opened up a discussion about pricing models.”

[Greg]: “We are staunchly tied to the concept that these types of solutions should be independent of any ties to the sales of seeds, fertilizers, or insurance. And that we will be protective of the individual farmers’ data…[Having big name competitors] suggests that this is an idea for which the time has come.  We have achieved escape velocity. There is no future without this technology.”

For more information about Cornell Center for Technology Enterprise & Commercialization, visit: www.cctec.cornell.edu

Cornell Tech Company: Agronomic Technology Corp (Part 1), Guest Post by Deb Eichten

Cayuga Venture Fund recently closed an investment in a company called Agronomic Technology Corp (ATC).  The underlying tech was developed at Cornell (like many of the companies in the CVF portfolio).  Completely unrelated to CVF’s investment, Deb Eichten, who is on the staff at Entrepreneurship at Cornell, recently interviewed the founders of ATC.  Deb follows many Cornell companies and writes about them for various Cornell publications and media outlets.

So, the following fits into both of my professional worlds (Cornell and CVF).  Hope you enjoy it.

Pioneering Better Ag through Big Data

Part 1 of 2 part posting by guest blogger Debra Eichten, Entrepreneurship at Cornell staff, interview with the founders of Agronomic Technology.

Nitrogen feeds half the world’s crops, but 50% of it can be lost to variable soil, crop and weather dynamics.   This leads to wasted expense, lower yields, and environmental degradation through greenhouse gas emissions and runoff. For more than a decade Harold van Es, Cornell Professor  and Chair of CALS Department of Crop and Soil Sciences, has lead a team of researchers and analytical  software developers  to create a modelling tool which would help address these issues. The resulting product adapt-N  has become the initial offering of Agronomic Technology.

Entrepreneurship at Cornell [EaC] spoke with the founders of Agronomic Technology about the challenges of being pioneers for a new era in agriculture.

[EaC] What advice do you have for students and faculty members with research backgrounds looking at entrepreneurship?

[Professor Harold van Es]: “I am a scientist who has some computational skills in terms of being able to do some coding but we engaged a professional developer to generate a prototype. There are actually four people named on the IP and it was a multi-disciplinary project…This was the first product to come out of our department.”

After working together for about 5 years in a high technology company, Greg Levow (Cornell, Dyson ’04) and Steve Sibulkin  were interested in identifying a new market where they could leverage their expertise in cloud technology to “do good for the world” and make money in the process.  Greg knew Professor van Es and had continued to follow Harold’s  research,  development and testing in conjunction with the Cornell Cooperative Extension.  After months of travelling and talking with farmers and agronomists, Greg and Steve determined that there could be a viable business opportunity with Adapt-N; they ultimately decided to launch the company in November 2013.  By April 2014, supported by a small round of funding with farmers as the initial investors ,they  took what the original Cornell team had created and rebuilt it into a cloud-based solution.

[Greg Levow, President & COO, Agronomic Technology Group]:   “When we get into the commercial realm, scalability, user interface design, localization and multiple languages, units of measures etc. you end up needing lots of different skills sets… You can have CIS skills but can’t take it very far without the scientists and conversely without the CIS skills you can only take the science so far. .. That blend of the two is where the magic starts to happen.”

 [Steve Silbulkin, CEO Agronomic Technology Group]: “An entrepreneur must understand if there is a market opportunity. Is this a thing where you can be successful – can you define and confine the risks?  A faculty member doesn’t have the time to think about market opportunities and the time frame required to move through the business model process.”

[Greg Levow, President & COO, Agronomic Technology Group]: “It really takes being on the outside world to learn the skills which are required like understanding the customer.”

[Steve]” I launched my first business in 1999, it was a web-based business and the tools available at that time cost us a few hundred thousand dollars just to get started.  Today that same type of utility can be executed at a very small percentage of that cost.  If I were a young technologist, I would be very excited about the tools that are available to me. The utilities that are available to start to prototype and to show incremental value — it’s an incredible time to be working with data!  ….Agriculture has a large new influx of data – we are creating a voice for the soil.”

Adapt-N is the only nitrogen modeling tool on the market backed by published peer-reviewed land grant research, fully transparent strip trial results across multiple seasons, and with data proving that it can improve grower profit while reducing environmental losses.  It was awarded the Ag Professional New Product of the Year in 2012, and was recognized as the top-rated nitrogen management tool in Walmart’s sustainability initiative.

For more information about Adapt-N and Agronomics Technology visit:  www. Adapt-n.com