To fast prototype and create brand new music apps (web, mobile or physical) in just 24hrs.
To bring together the music industry and the developer community.
To highlight and showcase the platforms and API’s of companies working in and around music tech.
To foster cross-platform and cross-device innovation.
Looks like a great event for local startups and developers to get access to APIs and hopefully distribution.
Music Hack Day Toronto will be held on August 10th-11th, 2013 at the The Glass Factory, 99 Sudbury St.
If you are interested in participating in the fast prototyping and creation of brand new and innovative music apps, be sure to register (tickets are free) for Music Hack Day Toronto today.
We’re on the official Grow Conference schedule. Together with Communitech, we are hosting a party. You can decide for yourself if these conferences are right for you or your business (need help, check out Kevin Swan’s piece for insight). But we’re going to be there. We are going to be highlighting Ontario startups (and investors). Who is coming so far?
We’re looking for startups to highlight, stories to tell, and connections to make. We need startups. We need sponsors. We need volunteers. If you’re coming to Grow Conference please feel free to join us on August 14 at The Portside Pub.
If you have an Instagram account, you can slap a price tag on anything, take a picture of it, and sell it. For instance, you could take this can of San Pellegrino, paint it pink, put a heart on it, call it yours, and declare it for sale. Even my grandmother has an Instagram business! She sells dried fruit.
Amazing. This is not only such a low-impact way of testing the market for a particular product, but it’s so smartly circumventing issues around modern shopping cart systems.
Specifically, the sellers can:
Easily update their inventory from their mobile phone.
Quickly share new inventory across multiple networks.
Easily conduct their business from their mobile phones by leveraging low-cost options like WhatsApp.
Leverage another network without the need to integrate APIs. In this case, by using Instagram directly.
No storefront maintenance, no hosting requirements, no need for a desktop or tablet, no fancy marketing. Just the goods.
This kind of lightweight testing is great for getting an understanding of market interest in your product and can lead to great insights, just like the four noted above.
[Ed.note: This post originally appeared Say Yeah! blog on Friday, July 12, 2013. It has been republished here with permission]
Global software vendors are starting to feel the disruptive effects of the software as a service business model (“SaaS”). The SaaS model is growing at an annual rate of 15%-20% and will likely represent approximately 25% of the overall software market in the next 5 years. Although this trend is starting to call into question the viability of the traditional software business model, we are quickly reminded that today 95% of software businesses still earn most of their revenues and profits from traditional perpetual licenses and maintenance revenue streams that continue to experience year-over-year single digit growth.
For the large global vendors, it is difficult to transition from a traditional license to a subscription-based model. If you look at the largest 10 global enterprise software companies including Microsoft, IBM, Oracle, and SAP, less than 2% of their revenues are derived from SaaS.
Global Software Companies With Large Cash Positions Will Be Looking to Increase SaaS Penetration
Here are some of the reasons we believe the transition has been so difficult:
It is hard to move away from the significant upfront fees earned through perpetual licenses to a much smaller recurring monthly fee. This would decrease immediate earnings and negatively affect the valuations of the large public vendors.
The SaaS business model has not yet proven itself in any meaningful way to be viable given the limited number of software businesses that have achieved scale and profitability.
Most in-house development and implementation teams are not structured to build and deliver multi-tenant solutions through the web. This requires significant investment and time.
Traditional sales teams have not educated their customers to accept monthly recurring fees and are not structured to facilitate a low touch sales approach.
IT departments have been reluctant to share sensitive data through the web for security reasons.
However, the SaaS business model has some clear advantages that are compelling to its customers:
There are no significant upfront fees.
The client always has the most up-to-date version of the software.
The software is easily configurable and takes less time to implement than on-premises solutions.
Security has been less of a concern with the introduction of secure data sites and private clouds. Software is being audited to ensure it meets compliance guidelines.
Employee workflow is much more efficient, the software is mobile friendly and can be accessed from anywhere.
There is no question that the SaaS delivery model is more efficient and compelling than an on-premises solution. Having said that, businesses have invested significant time and money in legacy software and in the foreseeable future these businesses will be reluctant to make a change.
As businesses gradually adapt to the SaaS model, it is taking a while for SaaS companies to reach meaningful scale. Selling licenses at thousands of dollars a month (and in some cases hundreds of dollars a month) and educating customers along the way is a difficult path. We estimate that there are only 50-100 private companies in Canada that have reached critical mass in excess of $5 million a year in recurring revenues.
We believe that the limited number of SaaS businesses of meaningful scale has created scarcity in the market, driving up valuations. The ten largest global enterprise software companies have in excess of $200 billion in cash and are looking for ways to increase their exposure to the SaaS market. In June 2013 there were two significant acquisitions: SAP acquired Hybris for $1.3 billion and Salesforce.com acquired ExactTarget for $2.6 billion (8.1x LTM revenues). In 2013, seven companies went public and are currently valued in excess of 6x revenues. Additionally, the group of public SaaS businesses that we track currently trades in a range of 5.0-6.0x 2013 sales.
Software Companies Have Looked to Grow Through M&A And Will Continue To Do So
Although venture capital and private equity’s interest in the enterprise software space is at a historic high, the dollars invested in Q1 2013 is at one of the lowest points in the past 5 years. We believe that three factors are likely driving this decrease in activity:
There are a limited number of SaaS businesses that have reached scale and are supported by experienced management teams.
Most of the venture dollars have been sitting on the sidelines and have been raised by fewer funds that are not readily accessible.
Valuation expectations of entrepreneurs are not in line with those of investors.
Enterprise SaaS Valuations Remain High
We are confident that the SaaS business model will continue to gain acceptance throughout the market and that we will see emerging Canadian SaaS businesses gain critical mass. In turn, these businesses will be well funded by both Canadian and US venture capitalists. In addition, there have been over twenty $1 billion strategic SaaS acquisitions since 2011 and we expect this pace to continue or accelerate as the larger enterprise software players seek to participate in this major market transition.
A great dialog recently broke out on Twitter after this tweet from Debbie Landa calling out Alberta and Quebec startups to step up and have a presence at the upcoming GROW conference in Vancouver. Having my home in Alberta I immediately put the call out to a number of the great startups currently in the province. The consensus reply I got back was ‘too busy building and getting customers!’
We all know those entrepreneurs and investors (probably the worst offenders!) who find a conference to attend every week. I often wonder how they actually build a company when they devote so much time to the conference circuit. Even in my own life I have recently been making attempts to limit the number of conferences and events I attend as they can really get in the way of work and family. However, there are some that you just can’t miss. I would definitely put GROW into that bucket, but should startups as well?
GROW is unique as it has quickly become the top startup conference in Canada and almost half of attendees are from the US. This provides a great opportunity for entrepreneurs to connect, learn and move their companies forward. So why are some startups not taking advantage of this opportunity? Probably not a single answer to this question, but I want to share a few theories.
First, lets quickly review why an entrepreneur should attend a conference:
Customers! Obviously if there is a conference that brings together the majority of your target customers you need to be there.
Fundraising. Don’t expect to go to a conference, meet an investor and get a check. However, it is an opportunity to gain visibility for your company, initiate relationships with potential investors (or better yet, with the entrepreneurs they have invested in) and show them why they need to follow-up.
Recruitment. Startup conferences attract a lot of talent and it can be a great opportunity for your company to gain visibility for the purpose of recruiting.
Partnerships. Many conferences attract execs and corp dev people from large tech companies. This provides a great opportunity to meet with them and pursue that partnership that can take your company to the next level.
Influencers. I have already mentioned the visibility a conference can give to your company. To compound this, there will likely be many bloggers, journalists and influencers present that may write about your company after the event.
Learnings. Technically this isn’t a real word, but I love using it. Good conferences will have thought leaders speaking that will challenge your understanding of the market, technology and building a company. These experiences can be priceless.
Community. There is nothing quite like the energy and camaraderie that an entrepreneur can experience at a great conference. Entrepreneurship is hard, can be depressive and often lonely. Being surrounded by peers rallying around defying the odds and building a successful company is sometimes needed to push through the hard times.
What have I missed?!?
For a more general conference like GROW that are not focused on a particular industry – compare this to Debbie’s other hugely successful conference, Under the Radar, that focuses on the enterprise and attracts many top CIOs and CMOs – it is hard to justify attending to connect with customers unless you are a consumer company. If you fall into this category then you need to attend conferences like GROW to reach the influencers that can provide social proof for your product and provide quality feedback.
So, back to the original question. Why wouldn’t a company attend GROW? If you are a seed company it may be a financial issue. Debbie pointed this out as well. If you have raised a Series A finances should not be the issue. Travel time may be though. Canada is a big place. Coming from Quebec would require two additional days to travel plus the time for the conference. This is the similar challenge New York startups face in attending conferences in the Silicon Valley.
I believe a key factor in all this is the vertically-focused nature of many Canadian startups. I have long been of the belief that there are certain companies you just can’t build anywhere other than the Silicon Valley. They may start somewhere else, but need to end up there. Case in point, Pinterest, which started in Kansas City, but quickly moved to San Francisco. In Canada, it is a great place to build SaaS companies, specifically vertical SaaS companies. This includes great companies like Wave, Shopify, Clio, Hootsuite, Jobber, Top Hat, Freshbooks, TribeHR, Unbounce and the list goes on.
Lets quickly fly through my above list in the context of many of these SaaS companies:
Customers. Very unlikely that Clio will find lawyers or Jobber find landscapers at GROW.
Fundraising. These companies all have great investors behind them already.
Recruitment. For local Vancouver companies this item makes a lot of sense. Tough for startups anywhere else in Canada though.
Partnerships. Vertically-focused SaaS companies need to partner with industry specific organizations and companies (legal, accounting, transportation, etc.). Unlikely they will be attending a startup conference.
Influencers. Unlikely that a big blog hit from Robert Scoble is going to reach SMB owners.
Learnings. This is valuable, but not just for the CEO. My suggestion to the CEOs with companies farther along is to send someone from your management team if you can’t attend.
Community. Definitely still a factor, but if you are a Series A company or beyond you may not be able to prioritize for this as much.
In conclusion, it appears that a vertically-focused SaaS company from outside of Vancouver would have to work harder to prioritize attending a conference like GROW. Personally, I think that there is a balance here and if these companies are going to attend at least one conference for the learnings and community it should be GROW. Or, as I mentioned above, at least send someone from your company.
Selfishly, I am a fan of what Debbie has built in GROW and it would be great to see every startup across the country there in addition to the many from the Pacific Northwest and California that attend. However, founders are faced with tough prioritization items everyday and I don’t feel it is my place to push them if they feel their time is better spent heads-down with their team building the company. What do you think the balance is?
Regardless, GROW is going to be a great event with a ton of top entrepreneurs, investors and startup people!
[Editor’s Note: This post originally appeared on Kevin’s Once A Beekeeper blog on June 30, 2013]
First, a quick quiz…For this quiz, time is important as we want your gut instinct so you only have five seconds to answer before the submit button goes away. It’s multiple choice, there are only two options and you simply need to select one.
When you’re ready, go take the quiz and make sure to return here…
Pricing, Business Models and Virtual Goods
The topic of free and freemium pricing models is a regular one in startup land.While I’m sure it comes up on occasion in more traditional businesses, I have a feeling it’s much less the case. I don’t recall Mark pondering the option of offering free drinks and meals for the first six months at OX Restaurant. Or Beth considering just giving sweatshop free clothes away for the first three months at Grey Rock Clothing.
“When something is FREE! we forget the downside….we just can’t resist the gravitational pull of FREE!”
Over in startup land, it’s almost universal that first time founders plan to launch their product initially for free. While the free excuse list is almost infinite, a few samples include….
We really want to get people in and using it, get them hooked on the app before we start charging.
Because this is such a new innovative way of doing things, we can’t charge them, they just won’t pay until they use it.
Once we have enough users, we’ll start monetizing through ads but we can’t sell ads until we have the users.
A FREE image!
To be clear I’m not advocating against free or freemium models. In some cases they make great sense, however those cases are rare. What I am advocating is that you make that decision explicitly and can back up your reasoning. I have yet to speak with a new founder who plans on offering free initially AND has a good reason for it. Someone who’s explicitly thought it through and has clear, sound reasoning why they’re starting with free.
Making an Economic Choice
In new product development, what is much more important than free users are the hard no’s. What’s a hard no?
“Here’s a pink stuffed animal I made, do you like it?”
“Yes, it looks awesome, you’re a lovely human being, let me hug you…”
“Will you buy this pink stuffed animal from me? Will you please give me 20 of your hard earned dollars for this pink stuffed animal I made?”
“You want me to give you 20 bucks for this crappy stuffy you stitched together? Are you mad?”
There, that’s a hard no. It’s someone saying no, I don’t see enough value in this exchange for me. Hard no’s are money in the bank for startups, if you leverage them. You have to chase down every hard no and ask why, why, why? Why don’t you love me anymore? Why doesn’t my value proposition work for you? Would you pay $10? What if I included a lifetime warranty? What if it was $5 plus a lifetime warranty?
Starting with free removes your ability to get to those valuable hard no’s almost entirely. Now rewind the above conversation…..
“You want me to give you 20 bucks for this crappy stuffy you stitched together? Are you mad?”
“I’m just kidding, we’re giving them away for free as part of launching our new company, here it’s yours!”
“Thank you! I love you again, that was a close one”
See the difference? Few people can resist the power of free. You feel great about your pink stuffed animal, love is in the air, everybody happy, happy, happy.
What happens to the pink stuffed animal? The same thing that happens to most free software apps, it’s neglected and dies a slow quiet death in a dusty basement. Dad never says “hey, why aren’t you loving that pink stuffed animal? I paid $20 for that you know?!”
Here’s the thing you must realize, free is a reality distortion field of it’s own. We can’t control ourselves around free. Remember the quiz at the top of this post? I’m quite confident that greater than 75% of you chose the free option even though it’s not a rational choice. A $30 giftcard for $5 offers you $25 in value. A free $20 giftcard offers $20. That doesn’t matter since we go bonkers around free!
“Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!”
Clearly the rational choice is the $30 giftcard but free messes with our minds. In the book Predictably Irrational: The Hidden Forces That Shape Our Decisions, the author Dan Ariely digs into the details of how we tend to apply either market norms or social norms in these situations. Free confuses your customer into applying social norms instead of market norms. This will certainly increase your user count but if you’re building a business you need to iterate to a value proposition that works when customer’s apply market norms to them.
If it makes good sense, free it up! Just be aware how powerful free can be. Depending on how you use it, it can help or hinder you. Offering free prevents your customers from applying market norms to your offering. Having customers applying social norms can distort your offering in ways you may never recover from. Good luck selling those $20 pink stuffed animals six months from now!
We’re heading to Grow Conference in Vancouver. You should join us at the Portside Pub on August 14, 2013.
With our friends at Communitech, we are hosting Ontario Startup House during Grow Conference. The goals is to build a “house party” that highlights the amazing things that are going on in Ontario.
The details are starting to shape up, but here is the plan as it stands. We’re aiming to bring all things that are amazing and Ontario with us to Vancouver. We’ll be brining amazing startups, amazing founders, and amazing investors with us. We’ve managed to secure an amazing venue, The Portside PubFollow @ThePortsidePubGoogle+, in Gastown.
“On August 14, we’re taking over the hottest bars and restaurants in the historic Gastown area, home to Vancouver’s tech scene, and inviting you to host your very own “House Party” to show off the very best your technology community has to offer. All Houses will be within walking distance so attendees can easily move from House-to-House. Who doesn’t love a good house party?”
We are looking for startups and sponsors. We have great partners in Communitech, OMERS Ventures and we are actively looking for others that want to participate.We have the biggest and best venue for startups and founders to congregate during GrowConf. We’re aiming to bring the best startups, the best founders, the best beer, the best band, the best crowd to celebrate in Vancouver.
The event is open. We’ll have amazing startups, founders and investors hanging out – guarranteed. We’re planning a few surprises that should make for an exciting night.
Details
When: August 14, 2013
Where: Portside Pub, 7 Alexander Street, Vancouver, BC V6A 1E9
What: House party featuring the best startups in Ontario at GrowConf
Editor’s Note: This article was written by Danny Robinson and Boris Mann. Danny is a founder of Perch and long-time entrepreneur who has built companies on both sides of the border. Boris Mann is a managing director at Full Stack, a napkin capital investment firm in Vancouver. Both Danny and Boris are investors in Contractually .
One of the great things about the tech industry is the generousity of people, who have ‘been there and done that’, to share their time with entrepreneurs. The energy of sharing, connecting, approachability and equality makes startups so attractive.
Lately, there is an increased demand for attention and engagement of advisors and mentors. And, in speaking with other advisors in the community, there is a feeling that some entrepreneurs are exploiting the system and taking advantage of the good will of others. It’s not necessarily intentional or deliberate. Entrepreneurs are trying to get meaningful advice to maximize the outcomes of their companies for the least cost.
There are increasing demands on advisors, and it is partially the role of the advisor to manage their workload and volunteer time. But it is also the responsibility of entrepreneurs to understand the circumstances of when to ask someone to join your advisory board and when not to.
A Quick Guide to Recruiting Advisors
When a founder feels like he/she could use advice from someone experienced in a certain area. Whether it’s getting go to market strategy, product design, fund raising, corporate structure, making introductions, or simply adding credibility to the company (though don’t overplay the advisory board when raising capital – see Mark Suster’s post). Getting an advisor to help you out with skills that you don’t have inside the company is a great way to move forward.
One of your early “asks” to anyone you meet is to help introduce you to a potential advisor
1 – 3 official advisors is a good number to aim for initially
Finding an Advisor
It is the responsibility of a founder to source and reaches out to an advisor and asks to meet. There is no obligation for anyone to become an advisor. This is like a dating process. The goal is to build a relationship over time, where there is value for both the advisor and the founder in the role.
Leverage your existing personal and professional networks to connect with individuals that have shared interests
Use LinkedIn and Clarity.fm to identify and connect with potential advisors.
Attending local events, joining an incubator, and working at co-working spaces are additional ways to get introduced to potential advisors
Advisor Expectations
As an advisor:
You meet for coffee, get on the phone, and get to know the entrepreneur and how you can help. Maybe your personal skill set isn’t relevant, but you know someone else that would be a great advisor / investor / customer / channel / whatever.
You don’t expect compensation up front, you don’t lead with paid consulting offers (this is a huge red flag)
You show you can be helpful first in moving the startup forward.
There is no obligation to engage with a startup. You should not expect compensation and you should always create more value than you extract.
Standard Advisory Board Terms
But back on the founder side, here’s where it seems there is a bit of a problem in Canada: no follow through.
After accepting and otherwise being happy with the advisor’s help, you should reward them with an offer to officially join the advisory board.
Our guidelines for standard advisory terms are as follows:
0.1% – 2% depending on the level of advisor.
The level depending on the advisors’ stature in the community, but also their level of involvement. 0.5% is a good level to think about starting from, and 2% is extremely rare unless the advisor is directly helping close customer deals or raise money.
Do not offer cash.
It’s extremely rare that there would be a cash component. If cash is requested from the advisor, walk away, and look for a more sophisticated advisor. For further clairty, if the advisor will be in putting multiple hours per week, they’re not an advisor, they’re a contractor, in which case, cash compensation may be appropriate (see Brad Feld’s Compensation for [Advisory] Board Members).
Options vest monthly over 2 year period.
Either can terminate upon 30 days written notice.
For pre Series A companies, the strike price is set to about 10%-20% that of the last round of financing, or pre-financed companies, the strike price should be about 10% of the estimated value of the company.
Advisor agrees to one phone call or in-person meeting per quarter.
But no need to dwell on the terms of what they will do for you. Your initial meeting should be representative of what you will get in return, so pay no attention to getting specific on the details here. If it’s not working out, you can both get out of the deal anytime.
Generally, you should expect your advisor to follow up on your meeting with thoughts and links and verify that he/she will make the introductions promissed and in general do what they said they would.
Assuming the advisor accepts, entering into an agreement like this will explicitly link your success to theirs, and add their credibility to yours. Vesting them in your company’s success spreads out your champions, and creates more winners for the community at large.
As a startup founder, you’re going on a long arduous journey and you’re going to need a lot of help along the way. Building a strong set of advisors will be one of your first “asks”. These are people that can complement your skillset and fill gaps on your team, and add credibility (sometimes called social proof or traction), especially for first time founders.
If anyone has helped you in a meaningful way, and you have simply not known the proper etiquette, I encourage you to retroactively offer up advisory board options. Let’s make sure that us friendly Canadians are known for our official follow through, as well as our friendliness.
You can sign up for Contractually [Ed. note: Both Boris and Danny are investors in Contracutally] and use it directly with their free plan, or be old-school [Ed. note: at StartupNorth we prefer old skool] and use it manually.
A couple weeks ago I tossed and turned for hours, unable to sleep because of a TechCrunch article announcing the launch of a potential competitor. This happens once every month or two, and I’m sure everyone can relate.. This occasion was particularly annoying. A friend forwarded the techcrunch article to me which I opened while settling into bed for the evening. An hour of research on my iPhone later, I’m back downstairs coffee in hand, still doing research.
The funny thing is that the logical part of me realizes that startups worrying about other startups is irrational. But yet I can’t help myself from trying to find chinks in their armour and points of differentiation.
The good news is that I’ve gotten good at waking up the next day and realizing that a startup worrying about another startup competitor is like a 2 year old worrying about another 2 year old making the deans list instead of them.
It’s a war, not a battle, and chances are, both startups will evolve in a way that makes them no longer competitive. Some will be competing for the deans list. Some will be competing for the track team, but most will have dropped out.
But still … in my last startup, I can’t tell you how many hours of sleep I lost mulling over Xobni, Dropbox, Threadsy, reMail, ClearContext and others. With the exception of Dropbox and maybe Xobni, have you heard of these others? Probably not. In hindsight, they’re actually really good examples of why you shouldn’t worry that much about startup competitors.
1. They’re guessing … just like you
We were scared of Xobni, largely because of their uber connected and super alented team. Specifically Jeff Bonforte. But everyone’s guessing in Startups. Everyone. Including Jeff. Cofounders backgrounds, vanity metrics, and techcrunch articles mean nothing. Xobni was iterating like crazy at the same time we were. In the end, it looks like they might be acquired by Yahoo in a deal that doesn’t represent a huge win for investors. Everyone’s guessing.
2. Some pivot
Threadsy was building an all one one messaging system – combining facebook, twitter, email, etc. We thought it was genius … so much so that we were doing the same thing. Turns out Threadsy (like us) couldn’t make a business out of it, started building social graph analytics, and eventually were acquired by Facebook. Most times your competitor won’t be building what they’re currently building in another 6 months. Most times, you won’t either.
3. A lot die
Most competitors will die before they hit product market fit. A lot of times, that has nothing to do with the product and everything to do with cofounder squabbles, life getting in the way, bad investors, and the million and one other things that can go wrong.
4. Some acquired and stop innovating
We thought reMail and Gabor Cselle were onto something. They were former google / former YC, so easily intimidated us. We were building something similar called All My Mail and had visions of making the iPhone’s mail app not suck Google eventually acquired reMail but didn’t exactly use the technology to innovate and several years later, it’s mailbox that’s innovating the mobile mail experience.
5. Markets can support multiple players
Dropbox scared us. Former YC (again), great founding team, great investors. But our product (and I’d bet a half dozen others) was ahead of theirs. But we got scared and pivoted away. In hindsight, that market is massive, able to support more than one player. Box.net has obviously proven that..
Competition in startups is an interesting thing. It’s something we can’t help but stress about. But it’s illogical. Because in startups, there really are no Goliaths. We’re all Davids, and the real fight that we have is with convincing users to change their existing habits. Back in the day, our biggest competitor wasn’t dropbox. It was email, and the people that used it to share documents, too lazy to change their habits. That’s the case for most all startups.
I keep seeing entrepreneurs that complain to me after the fact that they took an investment with bum terms. It comes in many different ways, usually something like, “here’s my cap table what do you think?” or “I have this term sheet what do you think of the terms?”. The terms are usually appalling. But the entrepreneurs asking don’t know this until it is too late, they signed the documents, they spent the money, and now they want advice raising the next round.
https://twitter.com/rhh/status/344232460533518337
It looks like I’m not alone. If you can’t figure out this is war. This is information warfare. I forget that I work with a lot of great investors. They look for deals that work for them, their portfolio, for their investments and the potential investments. But I long ago realized that my interests and the interests of existing investors or potential investors were not always in my interest, particularly when things start to go bad. I wish all investors were as honest as Brad Feld with their desired investment rights. But there are bad investors out there. They look to use an information asymmetry to gain greater advantage over uninformed entrepreneurs. It allows them to buy large ownership percentages at reduced rates with additional rights that are not always in the favor of entrepreneurs. They tell entrepreneurs that it is ok, their capital brings additional non-dilutive government capital and the entrepreneur will have the cash to grow. They are trying to maximize their returns by exploiting the information asymmetry.
And I don’t like seeing people being exploited.
It is not the first time that someone has used both simple and sophisticated tactics to take advantage of people. Part of the creation of the Securities Exchange Commission to allow, in this case, the US government to bring civil actions ” against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law.” Before the enactment of the commission, consumers were protected by “blue sky” laws, but Investment Bankers Association told its members as early as 1915 that they could “ignore” blue sky laws by making securities offerings across state lines through the mail. Many investors are money grubbing capitalists and that’s the way I like it. But as an entrepreneur the only person looking out for you is you. So rather than leave yourself ignorant and uninformed it is your responsibility to reduce the information asymmetry. After all, it is your company and…
Knowing is half the battle
The person that is responsible for your success and the success of your company is YOU!
So stop blaming bad investors. Stop blaming lawyers. Stop blaming others. You need to take proactive steps to reduce the information asymmetry
Get educated
Due diligence on your investors
Participate and share
1. Get educated
Fifteen years ago, this information was very difficult to access. The first book that I read about venture capital was High-tech Ventures: The Guide For Entrepreneurial Success that was written in 1991. Part way in to my second venture (I was employee number 6 for the record) John Nesheim released High Tech Start Up, Revised And Updated: The Complete Handbook For Creating Successful New High Tech Companies in 2000. This was my early education about venture capital, high potential growth companies. But most of the lessons came from the school of hard knocks. But things have changed. There are a tonne of resources available to entrepreneurs. Here is a short list:
This is your business. You are taking outside funding. You need to understand what is happening in the process and why.
2. Due diligence on investors
The investor is doing diligence on you and your company. They are going to talk to your previous investors, your employees, your customers and maybe your prospects. They will take to people in their circle of trust to learn about the market, expected performance metrics, and your reputation. It is incredibly important theyunderstand the risks and accretive milestones before presenting you to their investment committee.
You must do your own due diligence on the investor before taking any money. This is going to be a partner in your company. It has often been described as a work marriage. You should need/want to understand more about this person, the firm they work for, and how they treat their existing companies and CEOs. Go for dinner, have a glass of wine, talk about your company, and figure out if you can work with this person for the next few years. Talk to other CEOs that they’ve invested at a similar stage as your company. Talk to the ones that succeeded, to the ones that failed. Talk to the people that the investor sends to you to do diligence. There are so many tools to expose social relationships that didn’t exist: LinkedIn will allow you to send InMails to past CEOs; Clarity allows you to connect with a lot of entrepreneurs and mentors that have a connection with the investor; AngelList is a great tool for discovery but it is also becoming a great way to see investments and help you in your diligence.
“the diligence factor was that I knew them, but had never taken money from them. It’s hard to know how people are going to react when they are at risk of losing money because of something you are directly responsible for until you are actually at that point.” – Brandon Watson
The above resources are amazing. However, I often learn best from the examples of others. I learned a lot from Mark Organ at Influitive. Mark shared stories about the good and the bad decisions he made in the early days at Eloqua. You learn a lot when you share a hotel room on the road as grown ups.
There are formal meetups like Founders & Funders. But seriously in order to have the trust, you need to get out of the office and the formalities of these events. The conversations come over a poker game. But you’ve got to put yourself out there, be vulnerable, and find people that can teach you something.
I believe so much in this that I’m renovating my house. I want a big kitchen for family dinner. All of my startups will be getting an invitation to Sunday night dinner. Why? Because I’m betting my family’s future on them, and I want them to be a part of the family. This includes the ones that I’ve invested in already and any of the companies that I’m looking at investing. I want them to hang out. I want them to help each other. Share metrics and tactics. I want them to tell you that I’m slow to invest. I’m slow even after I’ve said yes (but I hope they understand that it is because sometimes I have to do some consulting work to have investment dollars). (Now I just need the renovations to finish).
Feeling screwed?
I’m starting to think about publishing shitty term sheets, depending on the risks our lawyer identifies, with investor names. I’m not sure public shaming is right model, and my lawyer might tell me it is not. But I think that we need to elevate the conversation we as entrepreneurs are having with each other and our investors.
I’ll be publishing prospective term sheets in the next few days.
Some rights reserved by TonyFelgueiras
that was written in 1991. Part way in to my second venture (I was employee number 6 for the record) John Nesheim released 