Tuesday, August 11, 2015

why I favor 3 minute timed pitches

In addition to my work at Long River Ventures, I'm now working with Village Capital, an international accelerator program that features peer-selected capital.

One of the practices we have at Village Capital is a three minute pitch, inspired by Ignite-style presentations.

We've typically got a dozen companies in a cohort and while pitching is not the point of the program, it's still an important skill. We do venture forums in various formats and our companies need to be able to effectively introduce themselves to people. We've found that the best way of doing this is a three minute pitch with several restrictions:
  • A cover slide that isn't timed and is on screen when the company gets up on stage.
  • Following the cover slide, twelve slides timed for 15 seconds, on auto-advance.
  • An end slide, typically with contact information that is on screen when the company leaves the stage.
When the company gets up on stage, after a sentence introduction by us and a short value proposition statement by the company, we do the "click" to the first auto-timed slide. They don't have a clicker--again, everything is auto advance. Companies are not allowed to have a slide that is anything other than 15 seconds although they can take away one of their twelve slides and do a slide for 30 seconds. They aren't allowed to put sound and video into a presentation. We find that it's just too likely to produce problems. They are allowed to do animation within a particular slide. 

Why do we subject our companies to the regime?
  • As an audience member, listening to twelve presentations in quick succession with a similar cadence allows for easier pattern recognition. Also, if you don't like a presenter you know that they'll be off stage in a set amount of time. No rambling! Feedback from people who know is universally that the presentations from the Village Capital cohorts are among the very best they've seen.
  • As a presenter, forcing you to present without clicker, on auto-advance, ensures that your presentation stays on track and, in our experience, on average makes you a better presenter.
We do often get one company saying "I don't need to hew to that format, because I'm a good presenter." Our response is:
(a) this is the way we do it
(b) it generally improves the less good presenters--you'll be glad that the overall quality is high and this will reflect well on the whole cohort including you
(c) again, an audience listening to twelve presentations with a similar cadence can do better pattern recognition and therefore you have a better chance they'll remember you especially if you're placed towards the beginning of the presenters--the whole point of this is to produce meetings 1:1 after the presentation, not to communicate everything the audience needs to know

Sunday, August 09, 2015

phone failures

I currently have two mobile phones, one on Verizon and one on Google Fi. I know. Silly. BUT ... the other day BOTH of them failed. My Verizon phone suddenly went off network. No service. And this was in downtown Boston. I turned to my Google Fi phone. AND IT WASN'T ON NETWORK EITHER. I was in a location that has good mobile coverage. The only thing I can think of is that some tower that Sprint, Verizon, and T-Mobile are all on went off line temporarily. And unfortunately there wasn't a wifi for the Fi to jump onto. Anyway, I know these are first world problems but it did cause me to wonder if my old BlackBerry would have failed. I know that this was probably a network or tower problem that also would have affected a BlackBerry but it caused me to think about a few things:

  1. Why do my Motorola phones periodically, randomly just restart? My BlackBerry never did that.
  2. The more I use my old Miata (now 19 years and counting) the more I'm happy with it and the less attractive the new sports cars are. It's never failed, it's closing on 100k miles and it feels as solid and planted on the road as it ever did.
  3. I look at some of the EDC forums that are utterly obsessed with the reliability of knives and other gear and I do have to wonder if there's a market for some phone that is rock solid and doesn't ever quit. Makes me want something like an old BlackBerry that could switch networks like a Google Fi including hopping on wifi but just has basic functionality--nothing to cause unexpected problems.

Tuesday, July 28, 2015

Project Fi and using multiple Google Voice accounts

Project Fi is a test from Google of a new way of delivering mobile phone service.

I signed up for the service and got my very nice box of free goodies in the mail about a week ago. The package includes an external battery for recharging a phone or other device, a nice set of earbuds with an extra jack for a friend to plug in and a bumper case for the Nexus 6, the only phone that currently works with this service.

Project Fi uses both Sprint and T-Mobile in the U.S., plus open wifi networks, seamlessly switching between them. It also features a data plan that works like a budget. You set a limit but if you go over, there aren't penalty charges. You always pay the same amount per unit of bandwidth. Internationally, it is supposed to offer good rates and free texting.

When I signed up I gave Project Fi my Google Voice number but had forgotten that long ago I'd switched that number over to my own corporate account. Project Fi only works with @gmail accounts not corporate accounts. It took a little while for the excellent customer service folks at Project Fi to figure out how to handle the situation but in the end it made sense to take a new number for my @gmail account. This left me with my old number, the main number I use on business cards etc, still associated with my corporate account and still associated with Google Voice but not associated with my new Nexus 6. However, this isn't a problem as far as I can tell. Here's why: I can use Google Hangouts to receive and send texts from my Google Voice number as well as my new number which no one knows. And I can use the Android Hangouts Dialer to make calls from my Google Voice number. I think this is a fully workable situation. So, I'm therefore able to use two separate numbers on my new Project Fi account on my Nexus 6 phone--my corporate Google Voice number that everyone recognizes plus my new, unknown Project Fi number that's the number associated with my Nexus 6.

Friday, June 19, 2015

Racism and entrepreneurship

My Twitter stream in the last few days has been filled with outpourings of outrage about the killings of 9 people at the historically black church in Charleston, South Carolina.

What does all this have to do with the previous blog posts which have been about some technical aspects of convertible debt and crowdfunding?

The broader vision of many people involved in the activity of creating, launching and funding startups is that in some way we're all contributing to making the world a better place. We're also contributing to supporting opportunities of individuals to realize their dreams as founders and employees and customers, helping contribute to something of value in their lives.

All of this effort of humanity to better and better itself is horribly hindered by the threads of racism that still exist in our society.

Today the Wall Street Journal published the most amazing--amazingly horrible--article that says that these killings weren't about racism. It states that the institutionalized racism "identified" by Dr. Martin Luther King no longer exists.

The default that we are left with by the WSJ is that this young man was either (a) troubled or (b) evil. If you're secular you choose (a) and if you're religious you choose (b). But oh no, racism had nothing to do with it.

Of course he was troubled. But that doesn't mean that he didn't latch onto a culture where racism is prevalent. You have only to look at the statistics of both the number of African American's killed by their neighbors in their communities, the number of African Americans killed by police in comparison to the ratio of whites killed, and any one of many other statistics to see that the threads of racism are still wound tight within this society and within many of our institutions, warping all of our actions in bigger and smaller ways.

Does that mean things aren't better today than they used to be? Of course not. But to suggest we've washed our hands of racism, that we efficiently disposed of that ugly thing that Dr. King "identified" is mindbogglingly naive, blind, insensitive and well, racist.

Again, why does this matter in the context of entrepreneurship? Because to solve the world's problems or even simply provide great value to customers, you have to draw upon the best of people. You can't draw upon the best of people with deadly threads still wound around all of us. And so, in some way, all of our efforts suffer and many things are brought down. One of many things that is brought down, hindered, is the effort to better ourselves through invention, innovation and entrepreneurship.

Wednesday, June 10, 2015

the careful march forward of so-called crowdfunding rules

A while back I did a post that included a flow chart which was intended to give some guidance to entrepreneurs about the then new crowd funding rules. Recently the SEC approved additional regulation in its ongoing effort to implement the provisions of the Jobs Act. I've been asked by some entrepreneurs how this affects them. For early stage entrepreneurs it does not and it doesn't change the flow chart that I produced. Although nothing I write should be considered legal advice, I still think that flow chart is a useful tool. But here's an additional summary of the crowd funding rules.

Starting June 19, 2015, companies will have a new way to raise money from both accredited and unaccredited investors. These modifications to Regulation A, sometimes refered to as "IPO-Lite", allow a company to raise up to $50 million in growth capital. For early stage entrepreneurs, the operative word there is "growth". This is not something that companies raising a seed or A round should worry about. You aren't doing either an IPO or even a "lite" IPO. It might be something to consider at some point in the future but not at the early stage. Although the regulatory burden has been reduced, it's still not for a startup. If you want more information on this, Michael Raneri has been publishing some helpful articles in Forbes and other places.

The above is referred to as "Title IV" of the Jobs act, modifying Reg A. My flow chart refers to "Title II" which relates to the modification of Reg D. Those modifications went into effect in September 2013. The SEC took the old Reg D, the rules under which most entrepreneurs raise equity, and split it into two paths for entrepreneurs to raise private capital.

One path is 506b of Reg D. Under this rule entrepreneurs can not talk in public about raising capital. In other words, you have to be certain that you only talk with accredited investors not the general public. This is the old Reg D. Even though in the past people tended to talk publicly about their fundraising--in business plan competitions, for example--it really wasn't allowed. The modifications to Reg D clarified the regulations and essentially says that if you want to talk publicly--again, defined as an audience that may include unaccredited investors--you have to follow a new variant of the 506 rules, 506c.

The new Rule 506c of Reg D does allow you to talk publicly about raising capital ("general solicitation") but as with 506b, you can still only take in money from accredited investors. Why would you not always use 506c? The reason is that the reporting burden is significantly greater for the entrepreneur and places the onus on them, not the investor, to verify that investors are accredited. It is this rule that has opened up opportunities for general solicitation--crowd funding--from through platforms like AngelList. There's a good explanation of all this on the AngelList site.

What we haven't got to yet is regulation from the SEC allowing you, as an early stage entrepreneur, without the expense and time of Reg A, to take in money from unaccredited investors. This "real" crowdfunding is still not available.

Tuesday, June 02, 2015

some important thinking on convertible notes and liquidation overhangs

Two blog posts on convertible notes popped up recently and I thought I'd detail them a bit more in my own language. But you might be better served to just jump over to Brad Feld's post "The Pre-money vs. Post-money Confusion With Convertible Notes" and Mark Suster's post, as well as a further post, The Problem in Everyone’s Capped Convertible Notes by José Ancer.

The issue being discussed is a problem that has resulted from the use of convertible notes as investment rounds in and of themselves instead of as bridge notes to the next financing round, which is how they were originally intended. If a convertible note is used as a bridge, there is relatively little increase in value between the notes and the next round. But if a convertible note or notes stay in play for a longer period of time--say 12-18 months--then in the ideal case scenario, the value of the company has grown significantly. The problem is a feature in most convertible notes where the holders get an increased liquidation muliplie upon conversion if the valuation cap on the notes is exceeded.

Here's how it works.

Let's assume...
  • you're an entrepreneur who has issued $500k in convertible notes to investors
  • the convertible notes carry a $2.5MM valuation cap
  • new money invests $1MM in a Series A at $1 per share
  • the Series A is participating preferred with a 1x liquidation preference
Scenario 1

In our first example, we'll say that the next round investors invest at a pre-money valuation equal to that $2.5MM cap. New money would get 1,000,000 shares in Series A stock ($1MM * $1 per share) and the convertible note holders, upon conversion, would get 500,000 shares in the same Series A ($500k at $1 per share, ignoring interest in this example). The post-money would be $4.0MM. The new money gets 1x participating liquidation preference. In other words, regardless of what the company sells for, everyone with Series A gets $1 per share back on top of their participation on a pari passu basis with Common Stock holders.

Here's what the cap table looks like:

Common Stock: 2,500,000 shares or 62.5%
Series A (new investors): 1,000,000 shares or 25%
Series A (former convertible debt holders): 500,000 shares or 12.5%

If the company sells for $4.0MM, Series A would get $1.5MM out, and then get their pro rata portion of the remaining $2.5MM (37.5% in this case). This sort of participating preferred is pretty standard--almost every single one of the deals we at Long River Ventures have ever done has this feature.

If the company sells for $10MM, new investors get $1MM, note holders who are now Series A get $500k, and then both share in the remaining $8.5MM with Common.

If the company sells for $20MM, the Series A would get out their $1.5MM and then their pro rata portion of the remaining $18.5MM.

With me so far?

Scenario 2

Now let's assume that the $2.5MM cap comes into effect because next round investors think the company has done really well and are willing to invest above the cap set in the convertible notes. Let's assume that next round investors invest not at the $2.5MM cap but at a $10MM pre-money valuation. Let's assume they still invest $1M in a Series A and still get shares at $1 per share. They would get the same 1,000,000 shares as in the above example, but much less of the company. The convertible note holders wouldn't get 500,000 shares, they'd get 2,000,000 shares--remember, they have a $2.5MM cap and the valuation was $10MM. Therefore, they get 4x the shares in the first example. As an entrepreneur, you may not like that but that's what you signed up for.

Here's what the cap table looks like:

Common Stock: 10,000,000 shares or ~77%
Series A (new investors): 1,000,000 shares or ~8%
Series A (former convertible debt holders): 2,000,000 shares or ~15%

What you don't realize you signed up for is the same thing on the liquidation preferences.

Let's also assume the 1x participating preferred liquidation preference also holds in the second example. Just like in the first example, new money would get $1MM upon liquidation regardless of the company selling price, and then get their pro rata portion. However, the convertible debt holders would get a 4x liquidation because these liquidation rights are written on a per share basis, not on the amount of money invested. In other words, they are guaranteed to pull out $2MM off the top on their original investment of $500k.

If the company sells for $4.0MM, new investors get their $1.0MM back, note holders who are now Series A get $2.0MM back, and then all share in the remaining $1MM (pro rata of Series A in this second example is 23%).

If the company sells for $10MM, new investors get $1MM, note holders who are now Series A get $2MM, and then both share in the remaining $7MM.

If the company sells for $20MM, new investors get $1MM, note holders who are now Series A get $2MM, and then both share in the remaining $17MM.

Compare this second $20MM example with the same example above. The difference between $18.5MM and $17.0MM after payment of preferences is where the liquidation overhang lies.

To keep the illustration simple, I didn't include the discount on the next round that convertible note holders are also likely to get. In most cases, there would be a discount on the next round as well as the valuation cap so they would do a little better than this example. If you think that convertible debt holders get enough recognition for their risk in that discount and with the valuation cap, and that the liquidation overhang is overreach, go to the above blog posts for some solutions to this problem.