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Category Archives: Funding

Seed Stage Valuation Guide

I find it strange that with all the VC and Angel blogs out there, nobody seems to explicitly talk about the single most interesting term in startup financing: Valuation.  Look no further than Chris Dixon’s blog for elucidation on such nuanced terms as founder vesting, convertible notes with caps, etc…but where do you go to find out how much you should expect to give up at various stages in your company’s development.  In the past week alone, I’ve regrettably passed on more than one deal because the valuation the founder was seeking was an order of magnitude off from what was appropriate, and frankly I am pissed.  I am pissed that the earliest “committers” to these rounds aren’t advising founders that they are pricing their rounds incorrectly.  Notice I am not saying I am pissed that the early committers aren’t doing a better job of negotiating.  It’s not about negotiation, it’s about pricing a round in a way that does not lead to adverse selection when a founder goes out to fill the rest of their round.

By definition, the investors with the best deal flow will have a higher bar on what they do and do not invest in, and will be less likely to pay 2x the appropriate valuation for a deal when there are 3 others they are looking at concurrently that are better bets from a risk reward standpoint.  Conversely, the “me too”, “here today, gone tomorrow” early stage investor who is clamoring to get into a deal with the big name angel who committed early and independent of valuation will gladly pay up to play, but is that really the best move for a founder?  Probably not.  The reason that I’m not willing to overpay for an inflated seed round has nothing to do with returns for our fund.  It’s not a math problem I’m trying to solve where I say at $3M premoney we’re going to make a lot of money, and at $5M premoney we’re not.  Rather, I view a founder’s attempt at closing on their first round of financing at an out of whack valuation as a warning sign of a more fundamentally dangerous datapoint: bad judgment.  Whether I bet at $3 or $5 doesn’t matter all that much, but whether I am betting on CEOs with good judgment vs bad is an extremely good predictor of our fund’s overall success.  If you are raising your first round of capital, you should be pricing your round at the valuation where the absolute best investors in the market will all be excited and willing to participate, not at the maximum price where you can find some investors to participate.  If you’re not sure what these numbers are, I thought I’d explicitly articulate some signposts.  This is by no means absolute, and the market changes month to month, but here’s how I’d be thinking about it by stage of development and setup:

Startups Should Learn to Walk by Themselves

A couple of days ago a CEO of a startup company called me for advice.
This guy has a team of 5 developers and spending around $10K on his start up every month. He came with the following request: “Help me raise money for my start up. If by the end of next month we don’t raise money, I need to close down the company”.
This is an alarm sound for a startup, coming 1.5 month before you close it, looking for an investment?
So, yes, he was trying to raise before that for a couple of months now and it seems he did his best effort. But, what happened on those couple of months when he was trying to raise that capital and failed?
When talking to him I paid attention to something he said over and over:
“we are working on the next version, which will increase the value for our customers dramatically”. Wonderful statement, and very true probably.
I asked him, do you happen to sell your service for higher price when increasing the value? what’s the benefit for you, as a business owner?
That CEO was very enthusiastic, I heard it very well in his voice, it was amazing. He has a good product, has customers as beta testers and agreements with several vendors to sell through his platform. He did a really good job, putting all the pieces together, though one thing was left behind; “Charge from day 1!”
Joel, Buffer CEO, was charging his customers 3 weeks after he started working on the project, growing it gradually and being lean.
I told that CEO the same thing! Start charging your beta testers and cut on the burn rate. He was so dedicated for getting his product done and perfect, that the money issue was left behind.
There is a very small chance he will be able to raise that fast for an angel round.
Therefore starting charging them and cut expenses ( On the price of slowing development and “giving higher value to the customer”) would give him more time for that.
There is a very important lesson here for entrepreneurs. we love our startups, these are our babies.
We are excited to raise them and make them grow and bloom. BUT, we shouldn’t forget that:
“Startups should learn to walk by themselves” -> ( Tweet that )

The Biggest Finance Mistakes Young Professionals Make

It is unfortunate that many young professionals do not worry about financial affairs. This is especially true for those in their 20s who feel that they are simply too young to dwell on financial decisions and planning. And then, when they are ready to get their finances in order, they often find themselves up to their ears in debt.

However, there are ways to get beyond these problems and live a debt-free life. The key is to recognize the mistakes you may be making and do your best to avoid them in the future. Listed below are some of the biggest finance mistakes young professionals make.

Living Without a Budget

All too often, young professionals tend to live way beyond their means. While this may be OK in the short-term, it can hurt you in the future. Their reasons for not controlling spending are many. However, there are two main reasons: they were not taught to live frugally, or they simply do not want to place restrictions on their entertainment expenses.

You must learn to make sacrifices if you want to succeed in the future. In short, never live beyond your means. Instead, create a workable budget and strive to stay within it. This may mean opting for an older car model rather than a luxury vehicle, or choosing to rent an apartment instead of buying that townhouse you like.

do I really need to do a business plan?

I’m often asked: do I really need to do a business plan? In short: yes, you really do. Here are a few reasons why:

 

1. Business Viability

 

Having a great idea for a business is one thing, but actually understanding what it takes to make a success of it is another altogether. Say you’ve invented a witchamajig – you can get it made for £1 and sell it for £5, that’s great! But if you want to make a decent amount of money out of it; you’ll have to make and sell your witchamajigs at scale. This means you’ll need to pay for storage, transportation, an office and staff. Your customers are unlikely to come running towards you bearing wedges of cash, so you’ll need to find them by spending money on marketing and advertising. To grow, you’ll need to sell your products to other retailers or distributors, who will expect to buy at wholesale.

 

When a business grows, its cost base rises. It’s really important to think about this in advance; putting it all down on paper can really help you to understand if the business is actually viable at scale. It can also help you to plan for any nasty surprises further down the line.

Is Crowfunding Right For Your Business?

Crowdfunding has taken the startup world by storm and has given business owners another choice at raising capital for their cash stricken business. Most start-ups are suitable for websites like Kickstarter or Indiegogo but some should be cautious! Outside investment can be hard and challenging but having an unsuccessful Crowdfund campaign could not only waste time and money, but also kill your drive. Ask yourself the questions below and find out whether your startup is ready to launch a Crowdfunding campaign to help reach your funding goal.

Is your concept innovative and exciting?

Crowdfunding is all about the journey for the backer!  They watch you build your project every step of the way and each backer is willing to wait months to receive the finished reward.   If they have seen your idea done before, that excitement for them is reduced significantly.  Your goal is to educate them on your new concept and give them a reason to fund YOU.  Only then, will they take a chance with you on this new and exciting idea.  Adding features people have not seen and including extra benefits will dramatically help your campaign.

Are your rewards tangible?

People love stuff they can touch, receive, and show off to others.   Your campaign is off to a good start if your idea/concept is an actual tangible product that you will eventually have to ship.  Many campaigns fail simply because people don’t want to wait 3 to 6 months to actually see the final version or watch it slowly built on the web.

Exceptions – movies/documentaries, app games, supporting a cause

What is the reason behind what you’re doing?

Backers want to support campaigns that have a real story behind them.  They want to know the “why” you are doing this and “how” you got started.  So give them what they want and make it easily understandable in your video. Let potential backers know the struggle that went along with making this dream a reality.  They want to feel like they helped you overcome the obstacle that was stopping you from bringing your product/idea to life. Also make sure to let them know “who” you are and even “where” you are located just to help people feel a real connection with you.

VC Funding of U.S. Companies Falls to Lowest Level in 3 Years

Venture-capital funding for U.S. companies fell sharply year-over-year in the second quarter, marking the lowest level of venture investment in three years.

In the second quarter, 801 U.S.-based companies raised $7.22 billion from VC firms, according to Dow Jones VentureSource, a research unit of News Corp. A year ago, 959 companies raised $8.91 billion. The level of VC investment last quarter marked the lowest level since the second quarter of 2010.

 

The number of Series A, or first-round, deals also fell, to 255 from 339 at the same time last year, according to VentureSource.

And, to round out the bad news, the median pre-money valuation for companies also fell sharply to $10 million from $14 million.

Dow Jones VentureSource cited a range of factors for the decline, including more caution for seed-stage companies, a sluggish fundraising environment for venture capitalists and less demand for consumer-focused Internet companies.

Information technology companies received the most funding in the second quarter, taking in $2.1 billion, or 29 percent of the total. Financial services and health care each took in 18 percent, according to VentureSource.

New York-based Internet retailer Fab took in the highest amount in a single funding round, getting $150 million in June to put the company’s overall valuation at more than $1 billion. That deal was led by Chinese Internet company Tencent Holdings.

The second-largest funding was to ecommerce company Acumen Brands, of Fayetteville, Ark. It raised $83 million in a deal led by General Atlantic Partners.

There is a bright spot, though, amid the bad news on funding: Exits of existing deals through initial public offerings rose. Eighteen venture-backed companies held IPOs in the second quarter, according to VentureSource. That is double the number from the first quarter.

However, merger-and-acquisition activity among venture-backed companies fell slightly. There were 84 such deals in the second quarter, compared with 87 in the first quarter. The largest acquisition in the second quarter was Google’s purchase of Waze for $1.3 billion.

Read more: http://www.entrepreneur.com/article/227484#ixzz2ZrduNTNa