By Alan Brody
Speakers: Ian Sigalow, Partner, Greycroft Partners, Stephen Brotman Managing Director, Greenhill & Co, Graham Lawlor, Founder, Ultralight Startups
As we continue our Job Generation series of matching senior execs to Start-Ups, we had the June event to take stock - from the VCs perspective. Our featured speakers, 2 active New York investors spilled the beans on the money side while our dean of agile Start-Ups kicked in with confessions from the entrepreneur side.
The result is an eye-opener - and if you are looking to boost your Start-up or work with one, pay attention.
1. Very few companies get funded.
2. Angel-funded companies still have to grow to the next level – there is a very small chance of a follow-on round if you do not grow dramatically
3. Your best chance for breaking through is by building a savvy, connected team that includes some industry veterans. But you need to make it worth their while to come over to your side.
What we learned from the two VCs who do $500K - $2 million deals, is that you need to have high-growth potential in a rapidly growing marketplace in order to have a chance at funding. Then, the best way to get their attention is to have other people in the industry rave about you because word gets around in this community’s echo chamber. Getting a savvy player on board can help make the connection and will help you when they come calling.
The problem is that very few companies qualify for this kind of funding. Some get lucky and find an investor of one kind or another. This is not always to their ultimate benefit if they don’t use the money wisely and they don’t grow - but at least they have raised capital.
For everyone else, listen up, there are still plenty of opportunities. Some part of this is domain knowledge and experience – if you really know your business and you’re savvy, you will generally prevail. But a certain kind of faith and positive flexible vision is also key. Why - because you have to believe that you can prove yourself with whatever resources you have. Money is not everything. Too much of it can kill a company. Also, most start-ups find their real business or revenue opportunity down the road and it is usually starkly different from what they anticipated. So, being able to change direction to catch the right wind is key and investors have to feel comfortable that you will find that wind and adjust accordingly. Passionate amateurs tend not to do that.
Luckily for us, Ian Sigalow, a partner at Greycroft, LLC, Alan Patricof’s venture fund was on hand to break it down.
The single biggest thing he looks for is market size. If it’s not in the billions and growing rapidly, don’t bother. They need to make 10x within 5-10 years. In reality, they are searching for deals that are more likely to make them 100x. Seriously, is that you? If not how could you steer your enterprise toward that goal?
First, don’t be desperate. It takes at least 3 months to structure a deal usually longer. Your credibility is a huge issue. This is true even if you are the first to a huge new market. Who you are and what you bring to the table a big issues because if you fail to execute, there are so many others waiting in the wings to jump on your market.
That is one of the reasons that VC money tends to go to serial entrepreneurs. People who have done this before and succeeded are always preferred. They get the big bucks, the quick deals and even have the right to do a “me-too” company just because it is assumed they can execute.
If this is your first start-up you need help. You need to create buzz and then you need to have at lest two VCs looking at your deal to raise values and create a sense of closure. Otherwise, you wind up with meaningless phone calls, useless meetings and 90 day lockups. (Preferred no-shopping clause is 30 – 45 days)
VCs often refer promising companies to angels if they are pre-revenue and still working on their product development. That is usually a good thing. However, when VCs do their own Angel round that has its own special danger because unless you succeed spectacularly you are not likely to get follow on rounds from anyone other than the VC who may be even more disappointed than everyone else when you don’t beat projections.
[For the record:
Series A requires revenue and 3-4 customers
Series B 10 – 20 million valuation
Series C $100MM+]
Valuations – so here’s a big secret – go for a convertible note. Angels will ways try to hold you to a valuation. The lower the better. VCs on the other hand are more likely to prefer that you took a convertible note at a discount to the series “A” valuation – typically 25%. That means the company is more accurately valued and they know they are getting the best deal while you, the entrepreneur get to keep more of your company to sell to the VC. This is where find out how angelic your investors are – by whether or not they will accept the convertible note.
Know thy VC: do your homework. Know what kinds of companies they fund and why. Funds must be also be active – with the economic hiccups, many are walking dead.
Steve Brotman, the Managing Partner at Greenhill SAVP was quick to concur and we got to hear about his investments. Once again, your research is everything. VCs have areas of interest and their own theories of the marketplace. If you understand how they think you can determine who to go to and how to present your idea. Greenhill, and to a large extent, Greycroft, favors technology platforms that help automate services. Advertising can be transformed this way, so can financial products, even search engine optimization. If your product does something spectacular in those areas, and the market is getting B-I-G, they will probably want to hear from you. Or better yet, hear from a few of your credible fans.
What you need to know about VCs is that most exits are M&A driven at between $50 – 100 million. They want to see a minimum 10x and preferably 100x returns, so you can see how sharp the numbers have to be to get their interest. On the other hand, Steve spilled the beans on negotiating from the book “Hacking the Human Mind”: time pressure, lack of information and perceived opportunity can make otherwise intelligent people do strange things.
[For the record: Snapshot of Greenhill Investments
5 year old company growing faster than Twitter.
Medical metadata co. for testing.
Yellowjackets to consolidate IMs on trading floor.]
Graham is the founder of Ultralight Startups which is a lively forum for the kinds of agile companies that are sprouting everywhere. Graham quotes the patron saint of the movement, Steve Blank whose book, “4 Steps to Epiphany” lays out the case for these companies. They key issue is that it doesn’t take much to start a company today, whereas ten years ago it cost plenty. Making them work is lot like using the steps taken by savvy corporation in a successful product roll out. The problem is that everyone seems to be starting a company because they can, and in the noise, some key issues are forgotten. The point about a successful roll out is having something customers seem to want and not just something you are able to make. So step one is having a minimum viable product. You learn from early adopters what they really want and pivot your development around their actual needs and desires of these people. Then you build your customer base with leases and marketing and then you build a company.
That’s the theory. In practice, the market throws a lot of curve balls and the interest of the early adopters may be very different from the later adopters. So being nimble and agile and listening to the market and also knowing when not to listen is a whole other issues.
Bottom line: anytime there seem to be a lot of buzz as a promising market emerges and you get people to talk about you, investors will come calling.
Hal Charych has RFID automated gates for ski resorts. Generally seemed like it was a great idea but ought to be aimed at much broader markets. New York is not a ski investors market.
Alex Combos, EventNow. This site enables event planners to put their events out to bidding rather than having to go chasing after venues for pricing. Seems like a great idea but there are many big name like eVite that seem to be lurking in the wings.
James Mancuso, a former executive and CTO at Platform Computing Inc. a, Financial Services company in NY gave these Start-Ups helpful advice about growth and positioning.
COMING JULY 28 – The Exploding eBook/iPad Marketplace
Wednesday, June 30, 2010
Friday, June 11, 2010
Disaster Recovery: Are We Too Focused on the Big Bang to See the Deadly Little Bangs?
Introducing The Falling Tree Syndrome: Electrical Internet, Houses with Crash Helmets and Trees with Seat Belts.
By Alan Brody
Last Sunday The Scarsdale Forum at the Scarsdale Women’s Club hosted a lecture on “Dealing with Local Disasters: What Can Nuclear and Pandemic Disaster Planning Teach Us?”- a timely topic one would think, following the disastrous March storms. The trouble is, you quickly realize that Indian Point has a way of dominating all disaster conversations to the point that we may be overlooking the clear and present mundane disasters that surround us: trees and power outages.
After 40 years, Indian Point remains controversial but no one seems to have died from it. Yet, in the March storm 7 people were killed by falling trees. Over 200 trees fell in Scarsdale and Greenburg, thousands of homes and businesses went days without power, dozens of streets and even schools were closed and downed power lines threatened lives.
Yet, the conversation returns to Indian Point where you quickly find that few people have any idea where to gather or where to hide in case of an emergency. Almost no one has emergency food or Potassium iodide pills, the cheap, essential radiation protection. Is it possible that by worrying about the really big thing, a nuclear disaster, about which we feel we can do little, we see no reason to worry about the smaller, more pressing issues and so we wind up doing nothing at all?
Maybe, like the “broken window theory” in crime-fighting which was effective because clamping down on small outrages lead authorities to its larger sources, we should think of an equivalent “falling tree” philosophy. If we prevented the giant trees around us from falling on power lines in storms and lowered the vulnerability of the networks massive power disruptions our lives would improve significantly.
Houses with Crash Helmets - Trees with Seat Belts?
Trees don’t have to fall – or at least, not where we don’t want them to. Con Ed and the towns may prune trees or even clear-cut them around major transmission lines, but the remnants of the 200 fallen neighborhood trees show they have shallow root systems thanks to our rocky soil. Yet they tower over 60, 70, 80 feet leaving our power lines as vulnerable as our houses.
So why not think out of the box? My neighbor’s 65ft tree fell on his house but caused no damage t because of a large abutting arbor which cushioned the tree fall. Maybe this is the key to thinking of ways to protect houses from falling trees? Reinforced protection trim? Eaves with foam buffers. Rooftop airbags? A non-lightning conducting roof rim and tree catcher?
Half-timbered colonials may seem untouchable but once upon a time, so did cars without seat belts and footballers without armor. Injuries changed that – so why don’t we learn that lesson within the fragile sanctuaries of our own homes?
Could the trees be restrained? If you go to any circus, you will see acrobats hanging from threads – so why shouldn’t trees be similarly restrained by cheap, invisible non-conducting Kevlar-based materials. In some cases, they might use roof nets. In most cases, groups of trees could be networked, some harnessed others restrained. One day, we might be able to genetically shorten our trees, extend their roots or somehow anchor them in rock - but right now they are looming giants that threaten us with every storm.
Microgrids – Personal Energy and a Power Internet
Once a tree falls on a power line whole towns and even regions pay the price because the power grid is an interdependent and not very fault-tolerant mid 20th Century contraption. The obvious answer is to cordon it off into Microgrids that can provide their own energy outside of the Grid. These are ideal for downtown business districts, the town hall and schools but could also apply to whole neighborhoods. This would use a combination of Con Ed power and locally produced solar, wind, cogeneration, sound-baffled generators, fuel cell, clean natural gas or a new advanced technologies.
There are also major safety advantages because these Microgrids can use non-lethal DC transmission: streets will not be closed by downed lines and temporary workarounds are easy. The wires are smaller and therefore easier to hide or bury. They can generate their own energy during expensive peak hours while buying cheap off-peak power from the Grid. They also enable smart measuring, metering and powerbalancing appliances during peak periods – something that will only increase if we adopt battery-powered cars
When you consider the savings from tax credits the ability to create local energy (according to the U.S. Dept of Energy, as much as 9.5% of power is lost on AC transmission lines) and funds from the recovery budget Microgrids start to make economic sense. Most of all, there is a growing consensus that these represent the future of power and towns that don’t take advantage when they can will be left behind.
While we applaud the quick cleanup after the storm and the willingness to discuss the issues – the agenda has to move from the familiar and politically hardened debates to a realistic look at our immediate vulnerabilities and the rapidly evolving technologies that will transform our energy usage. Otherwise this storm will be a true disaster when it just might have been a blessing in disguise – one that opened the door to smart, safe and lower-cost green energy.
Alan Brody is an internet entrepreneur who recently graduated from the NYU-Poli Cleanech Execuive Program whose classmate Mathew Fairy and professor Mel Horwich assisted in developing these ideas.