tag:blogger.com,1999:blog-89920366771228372692024-02-19T23:59:08.407-08:00IMHOEd Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-8992036677122837269.post-36891942301801901422013-11-22T07:24:00.001-08:002013-11-22T07:24:31.592-08:00You’re Just Not Ready for Outside Funding (and Probably Never Will Be)<!--[if gte mso 9]><xml>
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<br />
<div class="MsoNormal">
As a mentor I run into many young (and not-so-young)
entrepreneurs who have apparently been conditioned by what Glen Hellman refers
to as the <a href="http://www.drivenforward.com/blog/the-startup-industrial-complex">Startup
Industrial Complex</a> to take the following steps in building their startup: </div>
<br />
<ol>
<li><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span>Get an idea<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"> </span></span></li>
<li><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Network and tell everyone you meet about your
great idea</li>
<li><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Take the gobs of money that angels throw at you</li>
<li><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Pay yourself a big salary get a cool office and
buy lots of swag</li>
<li><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span>Oh are there more steps?</li>
</ol>
<br />
<div class="MsoNormal">
Generally I find that most entrepreneurs I meet do a pretty
decent job at steps 1 and 2 on their own.<span style="mso-spacerun: yes;">
</span>When time for step 3 rolls around (from what I can tell somewhere
between setting up an LLC and well before developing an MVP or any significant
traction) the idea comes that they must now pitch angels and collect the cash.<span style="mso-spacerun: yes;"> </span>Since I don’t hide the fact that I am a
fairly active angel investor and member of <a href="http://www.baltimoreangels.com/" target="_blank">Baltimore Angels</a>, many times these
entrepreneurs come to me for advice on funding.<span style="mso-spacerun: yes;">
</span>Often they show me their ‘pitch’ which is so far off I can’t even figure
out where to start in terms of advice. <span style="mso-spacerun: yes;"> </span>It
can be a really poor pitch but more importantly the company is just not
remotely close to being fundable, and most likely they never will be.<span style="mso-spacerun: yes;"> </span>That is not necessarily a bad thing.<span style="mso-spacerun: yes;"> </span>The vast majority of new companies are just not
realistic candidates for outside venture investment. <span style="mso-spacerun: yes;"> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It is a fact that not all new small companies are ‘Startups’.<span style="mso-spacerun: yes;"> </span>As <a href="https://twitter.com/FAKEGRIMLOCK">@FAKEGRIMLOCK</a>
commented on a recent Glen Hellman <a href="http://drivenforward.com/blog/whats-a-startup-business-model#comment-1134336385">blog
post</a> “IF IDEA NOT INCLUDE "CAN SCALE TO HUGE MONEY WITH SMALL
COST" IT JUST A BUSINESS. NOT STARTUP.” They are small businesses that can
and should grow organically, funded through reinvestment of profits generated
by steadily growing revenues.<span style="mso-spacerun: yes;"> </span>This is
the vast majority of small business and accounts for most of the job growth in
the US.<span style="mso-spacerun: yes;"> </span>Some of the startups I work with
have sincerely and genuinely tried to follow the more ‘old fashioned’ approach
of concentrating on building a small business and have asked me for (and taken
my) advice.<span style="mso-spacerun: yes;"> </span>But there always seems to be
a feeling that maybe they should follow the ‘easy’ approach and just go and get
angel funding.<span style="mso-spacerun: yes;"> </span>I am often asked how they
should go about this (and less often IF they should).<span style="mso-spacerun: yes;"> </span>Some points I like to make to everyone I talk
to about angel funding are:</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoListParagraphCxSpFirst" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>The majority of angel funded startups fail. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>If you can build and grow your company without angel
investment, do so.<span style="mso-spacerun: yes;"> </span>You will be much
happier in the long run.</div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Don’t bother asking an angel for funds to develop
your MVP.<span style="mso-spacerun: yes;"> </span>I personally consider figuring
out how to do that without angel or VC funding to be the first test that you
encounter as an entrepreneur and the minimum entry fee for consideration of
investment.</div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">4.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>The more and better quality traction you have
before approaching investors, the better.</div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">5.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Don’t approach an angel/VC unless your business
is scalable and you have a business model in which the money you seek will
accelerate growth dramatically.<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">6.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Don’t pitch any investor without reviewing some
of the many excellent examples of winning demo day pitches posted on the web.<span style="mso-spacerun: yes;"> </span>As Paul Singh says, “Be the least shittiest
pitch of all the shitty pitches”.<span style="mso-spacerun: yes;"> </span>And
remember, you are not just competing for investment dollars with the guy next
door but companies all over the world.<span style="mso-spacerun: yes;">
</span>There is no excuse for not doing your homework.</div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">7.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Understand the economics of venture investing
and how investors (must) think about this type of investment.<span style="mso-spacerun: yes;"> </span>Paul Graham has some great posts on that
topic <a href="http://paulgraham.com/herd.html">here</a> and <a href="http://paulgraham.com/convince.html">here</a></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 37.95pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-indent: -.25in;">
<br /></div>
<div class="MsoNormal">
I really want to be positive and supportive when working
with young companies.<span style="mso-spacerun: yes;"> </span>But I am really
feeling now that the best way to help those seeking my opinions on angel funding
is to be as honest as possible to the point of bluntness (crankyness?).<span style="mso-spacerun: yes;"> </span>Most successful small businesses in the world
are bootstrapped and seeking outside investment should not even be on the
table. <span style="mso-spacerun: yes;"> </span>Instead of following the
‘standard’ process, I think that a renewed focus on building the business and
doing the required homework will better prepare companies for taking their best
shot at long term success. </div>
Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com4tag:blogger.com,1999:blog-8992036677122837269.post-48763007951739163912013-05-20T13:09:00.000-07:002013-05-20T13:10:47.996-07:00A Case for Convertible Note Valuation Caps<!--[if gte mso 9]><xml>
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A couple of weeks ago I attended an excellent Angel
Education session presented by Miles and Stockbridge at Betamore sponsored by
the Baltimore Angels.<span style="mso-spacerun: yes;"> </span>Being a relatively
active angel investor but still having a lot to learn, I was quite interested
in the topic of ‘Convertible Notes’.<span style="mso-spacerun: yes;"> </span></div>
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<br /></div>
<div class="MsoNormal">
Convertible notes are now quite common in early seed-stage
angel investing.<span style="mso-spacerun: yes;"> </span>Use of convertible
notes as a tool for seed-stage financing is fairly straightforward but there
are some parameters that need to be negotiated as part of the terms, including
the rate, discount, term, etc.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
While in my experience it is pretty straightforward to set
reasonable terms for a convertible note, one that usually seems to be the
biggest sticking point is whether or not to have a valuation cap and if so, at
what amount?<span style="mso-spacerun: yes;"> </span>A valuation cap essentially
insures that the conversion of the note to shares on a series A funding event
will occur at no more than a previously agreed-upon maximum valuation.<span style="mso-spacerun: yes;"> </span>This is probably the most polarizing of all
terms between the investor and founders.<span style="mso-spacerun: yes;">
</span>From the investor perspective, a valuation cap essentially sets a
reasonable floor on the percentage of ownership for the note holders when they
are converted.<span style="mso-spacerun: yes;"> </span>From what I heard from
some of the founders present it seemed like their feeling was that a valuation
cap of any kind gave too much away to the investors.</div>
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<br /></div>
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At first glance the reaction of an impartial observer might
be that a valuation cap seems to be not aligned with the interests of the
founders, and in an extreme case I agree this would in fact be the case.<span style="mso-spacerun: yes;"> </span>At a minimum it seems to go against one of
the main advantages of a convertible note vs. equity financing, which is that a
valuation is not required. <span style="mso-spacerun: yes;"> </span>At the
session the opinion seemed to be pervasive among the founders present that the
15-20% discount given to noteholders on conversion should be sufficient incentive
to invest.</div>
<div class="MsoNormal">
<br />
As an investor I look at this a bit differently.<span style="mso-spacerun: yes;"> </span>In the extreme, I agree that a note with a too-low
cap is not aligned with the interests of the founders, just as having a
too-high cap (or no cap at all) is not aligned with the interest of the
investors. <span style="mso-spacerun: yes;"> </span>I propose that a reasonable
cap is to the best interest of both parties.<span style="mso-spacerun: yes;">
</span>Here’s why.</div>
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From the perspective of a reasonable investor, a cap that is significantly too low, while it
gives the angels a larger percentage of equity on conversion, could actually be
a disincentive to future investors to fund the A round that will trigger the
conversion itself.<span style="mso-spacerun: yes;"> </span>This acts against the
interests of both seed-stage investors and founders.<span style="mso-spacerun: yes;"> </span>On the other hand, a cap that is too high, or
nonexistent, creates a situation whereby the interests of the founders and
investors to do whatever they can to increase the value of the company prior to
subsequent funding rounds are not aligned.<span style="mso-spacerun: yes;">
</span>Why should I as an early investor work to help the founder to increase
the value of the company prior to the conversion when it only means that I will
end up with a smaller stake?<span style="mso-spacerun: yes;"> </span></div>
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Fundamentally, it needs to be understood by founders that a
seed-stage investment by an angel in their startup is an extremely high risk
proposition.<span style="mso-spacerun: yes;"> </span>Many if not most of these
investments fail and are essentially total losses to the investor.<span style="mso-spacerun: yes;"> </span>While 15-20% discount looks like it should be
enough of an incentive to the investor, in reality it does not adequately
compensate for the many investments that fail.<span style="mso-spacerun: yes;">
</span>There must be a mechanism for the investor to share fairly in higher
returns for the few companies that succeed in the early stages and a reasonable
valuation cap is that mechanism. Part of any negotiation of seed-stage convertible note investment terms should include a reasonable valuation cap that will be low enough to incentivize the investors but also high enough that the founder will be quite happy to have their A round funding exceed that valuation.</div>
Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com0tag:blogger.com,1999:blog-8992036677122837269.post-12233015435240602132012-12-14T06:46:00.001-08:002012-12-14T06:46:51.908-08:00Some Tried and True Bits of Wisdom<!--[if gte mso 9]><xml>
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It hit me the other day how many times I have used the same funny (but true) phrases to describe situations that come up again and again in life and business. They usually elicit a chuckle from people who have not heard them before. Some of my favorites are:</div>
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<br /></div>
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"You can’t push on a rope" - I learned this one from my Engineering Mechanics professor in relation to solving certain EMech problems, but I find it applies really well to business, in that there are certain situations in which no matter how hard you push nothing will happen</div>
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<br /></div>
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"Like herding cats" - This is an old favorite that is appropriate in the situation where you have the unenviable task of leadind a group of poor followers</div>
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<br /></div>
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"Anal-cranial inversion" - We have all dealt with people like this - self explanatory 'medical' condition</div>
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<br /></div>
<div class="MsoNormal">
"A business partnership is like being married except you don’t love the
other person" - I learned early on from other people's mistakes (see below) that there is nothing more perilous than a business partnership and should be treated as such if you are seriously considering one</div>
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<br /></div>
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"Be careful; once you know everything God pulls the plug" - This is one of my own, illustrating that there is always something new to learn</div>
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<br /></div>
<div class="MsoNormal">
"Some people live and learn, other people just live" - Heard this one from a 9 year old on my son's baseball team when he arrived at the game without his cleats for the umpteenth time. Remarkably self-aware...</div>
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<br /></div>
<div class="MsoNormal">
"Some people learn from others' mistakes, some learn from
their own mistakes, and some just don’t learn" - a corollary to the above. Always strive for the first, but the second is also acceptable</div>
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<br /></div>
<div class="MsoNormal">
"X didn’t get rich by writing checks" - I think I heard this on the Simpsons referring to Bill Gates. I think it is true in general and a good response to those who say "X is so rich, it should be nothing for him to write me a check"</div>
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<br /></div>
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I am sure I will think of more as relevant situations crop up. Do you have any favorites to add to the list?</div>
Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com0tag:blogger.com,1999:blog-8992036677122837269.post-23884277645222996442012-09-07T10:32:00.001-07:002013-08-29T12:17:31.265-07:00Communication With Your Investors – the Good, the Bad, and the Ugly<!--[if gte mso 9]><xml>
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<span style="font-size: small;">Being a novice but somewhat active angel investor for the
past two years (I currently have 10 startups in my portfolio), one thing that
has struck me is the wide variation in communication levels between myself, as
an investor, and the management of the companies I have invested in.</span><br />
<br />
<span style="font-size: small;">A while back, I saw a great blog post by Ben Yoskovitz entitled
<a href="http://www.instigatorblog.com/weekly-investor-updates-how-to-communicate-with-investors/2012/02/17/">‘Weekly
Investor Updates (How To Communicate with Investors & Mentors)</a>. In it he describes a great system for
companies to keep in contact on a weekly basis with investors and makes the
point that <b>investor communication is
absolutely essential to the success of a startup</b>. Unfortunately I would say that only one out
of my ten invested companies comes close to following this excellent guideline. The other nine fall into the following
general categories: </span></div>
<div class="MsoNormal">
<br />
<span style="font-size: small;">1)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Fair – somewhat regular communication and
occasional requests for assistance/advice from investors – (3 companies) </span><br />
<span style="font-size: small;">2)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Poor – little or very sporadic communication,
primarily public product announcements – (3 companies) </span><br />
<span style="font-size: small;">3)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Horrendous – practically no communication with
the unfortunate exception of urgent requests for additional ‘bridge’ funding (1
company) </span><br />
<span style="font-size: small;">4)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Incomplete – recent investments that nonetheless
look like they will fall into the ‘Fair’ category at best – (2 companies)</span></div>
<div class="MsoNormal">
<br />
<span style="font-size: small;">Look, I am not a major investor in any of these companies –
I don’t ask for much, and proactively contact them only when I have heard
nothing for months at a time. However I
consider regular communication with ALL stakeholders critical to a company’s
success and an indication of both discipline and willingness to ask for
help.<span style="font-family: "Calibri","sans-serif";"> </span><span style="font-family: inherit;"><span style="line-height: 115%;"> </span></span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: inherit;"><span style="line-height: 115%;">Finally, I would note that in my case there does
seem to be a direct correlation between the level of communication and
performance. I don’t yet know in this
case which is the cause and which is the effect; do strong companies
communicate more (and poorly performing companies less likely to give out ‘bad
news’) or does communicating more contribute to a company’s success? I would hope for the latter, and I intend in
the future to make it clear to companies <b>before</b> I invest that regular
communication be a priority. </span></span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: inherit;"><span style="line-height: 115%;"><b>UPDATE - August 29, 2013</b></span></span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: inherit;"><span style="line-height: 115%;">After reading Glen Hellman's blog post on <a href="http://drivenforward.com/blog/the-sound-of-a-happy-angel-investor" target="_blank">what makes a happy angel investor</a> I thought I would revisit the communication issue with respect to my portfolio. Since I wrote this I have added to my holdings and had some 'acqui-hire' type exits.</span></span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: inherit;"><span style="line-height: 115%;">I would say my scorecard now reads:</span></span></span><br />
<br />
<span style="font-size: small;">1) Good - regular communication and regular sincere requests for assistance/advice from investors (1 company)</span><br />
<span style="font-size: small;">2)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Fair – somewhat regular communication and
occasional requests for assistance/advice from investors – (4 companies) </span><br />
<span style="font-size: small;">3)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Poor – little or very sporadic communication,
primarily public product announcements – (7 companies) </span><br />
<span style="font-size: small;">4)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Horrendous – practically no communication with
the unfortunate exception of urgent requests for additional ‘bridge’ funding (0
company) </span><br />
<span style="font-size: small;">5)<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Incomplete – recent investments that nonetheless
look like they will fall into the ‘Fair’ category at best – (1 companies)</span><br />
<span style="font-size: small;"><span style="font-family: inherit;"><span style="line-height: 115%;"> <b> </b> </span></span></span></div>
Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com0tag:blogger.com,1999:blog-8992036677122837269.post-11263160822335710562012-08-30T05:21:00.000-07:002013-01-02T11:57:31.829-08:00When Should a Professional Service Provider Consider Exclusive Service Contracts<!--[if gte mso 9]><xml>
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<br />
Moved to MIE Labs blog <a href="http://mielabs.blogspot.com/2012/12/when-should-professional-service.html" target="_blank">link</a><br />
<br />Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com0tag:blogger.com,1999:blog-8992036677122837269.post-30938096495330321382012-08-13T07:59:00.000-07:002016-02-29T12:50:27.341-08:00One Less Angel?<br />
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I have heard that the best way to get into blogging is to
wait until something disturbs you and then write about it.<span style="mso-spacerun: yes;"> </span>Well today I am disturbed about something I
have seen recently in the world of angel investing that may end it for me.</div>
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<br /></div>
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I started angel investing almost two years ago by joining a
local angel investor group.<span style="mso-spacerun: yes;"> </span>My goal was
to make money, of course, but I realized that first I had to learn more about
the current state of the startup world, both locally and worldwide.<span style="mso-spacerun: yes;"> </span>I knew that I could take two paths; one would
be to sit back, be cautious, learn as much as I could and then selectively and
carefully invest in some ‘sure things’.<span style="mso-spacerun: yes;">
</span>Of course if we could tell which ones were the ‘sure things’ then it
would be a piece of cake!<span style="mso-spacerun: yes;"> </span>I took another,
more aggressive approach, which was to pay my dues (literally) and learn by
doing.<span style="mso-spacerun: yes;"> </span>I have certainly learned a lot,
and continue to learn.<span style="mso-spacerun: yes;"> </span>The main thing I
have learned is something my friend Jason told me, which was “Until you have an
exit, angel investing is essentially a charitable contribution”.</div>
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<br /></div>
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At the same time, whether you believe we are in a bubble or
not, it seems to me that startup entrepreneurs have now been conditioned that Step
2 in having a successful startup (Step 1 being think up a snappy name that ends
in ‘ly’) is to raise a lot of money from angel investors.<span style="mso-spacerun: yes;"> </span>Many of these entrepreneurs do not understand
or care about the equation from the angel’s side, that even ‘sure thing’
investments are quite likely to fail.<span style="mso-spacerun: yes;">
</span>Angel investing necessitates a high risk tolerance but insanity should
not be a requirement.<span style="mso-spacerun: yes;"> </span>In any event, I
strongly feel that angel investors and startup entrepreneurs can and should coexist
in a fair and mutually beneficial relationship.</div>
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<br /></div>
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This brings me to what has been bothering me.<span style="mso-spacerun: yes;"> </span>I recently found out about a new startup,
FundersClub (<a href="https://fundersclub.com/">https://fundersclub.com/</a>) that in preparation for the expected
crowdfunding gold rush is enabling angel investors to invest in select deals at
a much lower investment size (ex. $1-2.5K vs. typically 10-20x that amount).<span style="mso-spacerun: yes;"> </span>My understanding is that they aggregate up to
95 or so smaller investments into one combined LLC investment.<span style="mso-spacerun: yes;"> </span>If the minimum total is not met, the overall
investment doesn’t close, a la Kickstarter.<span style="mso-spacerun: yes;"> </span></div>
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<br /></div>
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Initially I thought this was a good idea, and it may very
well be a great idea (for startups) in the end.<span style="mso-spacerun: yes;"> </span>It will
enable non-accredited investors to crowdfund (at this time it is limited to
accredited investors), and facilitate all investors to diversify their holdings
more easily than they could at higher minimum investments.<span style="mso-spacerun: yes;"> </span>The thing the is bothering me is that I
noticed that the first 5 deals on the site all have the same terms, which in my
opinion are terrible from the investor’s point of view.</div>
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<br /></div>
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In short, they all are raising on an <b style="mso-bidi-font-weight: normal;">uncapped</b>, <b style="mso-bidi-font-weight: normal;">undiscounted</b>
convertible note.<span style="mso-spacerun: yes;"> </span>I have seen arguments
from both sides for and against convertible notes, and I personally feel they
can be a good and fair way to structure seed stage investments.<span style="mso-spacerun: yes;"> </span>The problem from my perspective is that in
this case, the convertible notes are uncapped and undiscounted.<span style="mso-spacerun: yes;"> </span>The entrepreneurs (and by extension the site)
are offering investors to be allowed to invest in a note which will convert at
the time and price of the next priced round, whenever that may be.<span style="mso-spacerun: yes;"> </span>As an investor, aside from the fact that an
uncapped note puts me <b>at odds with the entrepreneur in terms of valuing the
next round</b>, the problem is that now I am risking my hard earned money much
earlier than the investors in the next priced round (which may be more than a
year off) with <b>no corresponding reward</b>.<span style="mso-spacerun: yes;"> </span>I
have thought about this a lot over the past few days and have come to the
conclusion that this makes <b>no sense</b>. <span style="mso-spacerun: yes;"> </span></div>
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<br /></div>
<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 115%;">I can only view this new approach as one sign
that angel investing may have ‘jumped the shark’. Another possibility is that the upcoming
crowdfunding boom is expected to bring a lot more suckers to the table, pushing
traditional accredited angel investors aside. I
have been told that the terms on the site are the same as those being offered
to and accepted by (presumably larger) investors not using the site, which is actually <b>more troubling</b> to me. I have invested in a few convertible notes
over the past year and have not seen any terms like this (yet?), although I
have been assured that these terms are considered by some to be ‘standard’. All I know is if this is indeed the direction
of early stage angel investing, there will be one less angel around in the
future. What do you think? </span></span>Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com0tag:blogger.com,1999:blog-8992036677122837269.post-75642467346757498932012-07-20T13:01:00.002-07:002013-01-02T11:59:00.740-08:00The Value of Outsourcing in the case of Analog IC Design and Development<br />
<span style="font-size: small;">Moved to MIE Labs blog <a href="http://mielabs.blogspot.com/2012/12/look-around-in-midst-of-hard-fought.html" target="_blank">link</a></span>Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com1tag:blogger.com,1999:blog-8992036677122837269.post-15773692270546400382011-01-05T09:01:00.000-08:002011-01-05T09:01:07.607-08:00Bootstrap your startupBack in 1995 I took my first steps as an entrepreneur and decided to move from the corporate world out on my own. At the time the concept was fairly novel, to be a consultant working from my home that could successfully develop new integrated circuits for vertical semiconductor companies. It seems hard to believe but back then 90% of my sales effort was convincing potential customers that their designers didn't need to all be sitting in the same building with the fab! Anyway that is material for another story...<br />
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The point I wanted to make here was that in my current role as a newbie Angel investor, I have already seen many strong entrepreneurs with great ideas that nonetheless are not really appropriate for outside investment, at least not yet. Most of these ideas are not at all capital-intensive and at the same time while being great ways for the entrepreneur to make a good living, they do not lend themselves to the scalability or quick revenue growth favored by outside investors. I feel for the entrepreneur facing the 'no' answer. It makes me think that if I had counted on outside funding back in 1995 my business would never have got off the ground.<br />
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So how did I do it? Bootstrapping is the key. I needed some cash to buy a computer and some cheap (but still fairly expensive) design software. But all other costs were minimized. The office was an old desk in my basement. I did not pay myself much of a salary. In my case this was relatively painless because my wife had a full time job. "That's cheating!", you say, but there were times when my wife was out of work and doing her own thing and I had the old corporate job. With so many two-income families these days I don't think this situation is all that unique. The key is having the support of your spouse and both being frugal enough to live off the one salary for a while.<br />
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As my business grew soon I had to make a decision to bring on additional designers. Each designer I brought in required a significant capital outlay for equipment and software. At the same time I was not comfortable having a group of people working in my basement so I needed to find a cheap facility. I think even more so today than back then there are many lower-cost options for office space for startups. Some of these, like incubators subsidized by local economic development departments, are actually quite nice, but in any case a secure, safe workplace should be the primary goal, not a slick, fancy office. I would much rather spend a little more money on having an impressive web presence rather than an impressive office space (of course this may not apply as well to a retail startup).<br />
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Finally, the team you assemble has to be bought into the concept and motivated primarily by the work itself. Salaries by necessity have to be scaled back, replaced by stock or option ownership in the firm. Leadership and teamwork are the key here. Once the business is well-established it is much easier to get outside funding if required but in many cases the original goals will have been achieved without that need. <br />
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Through some creative thinking and shared sacrifice the 'no' from outside investors does not have to be the end of your dream.Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com0tag:blogger.com,1999:blog-8992036677122837269.post-26749950933537603352011-01-05T06:29:00.001-08:002011-01-05T06:29:59.678-08:00My first foray into the blogosphereHopefully more interesting content to follow...Ed Chalfinhttp://www.blogger.com/profile/12018193864489527980noreply@blogger.com0