When deciding to back a founding team, what do you look for?
- Notice that in every case we referred to a founding team and not an individual founder (we prefer a team of two or three co-founders with complementary skills; the team needs to be supremely passionate about the venture; preferably two developers or engineers and a business person/evangelist that can create buzz, attract funding, set-up and take meetings, conduct market research, take care of the books, and generally deal with all of the non-development related issues; we don’t believe that it’s possible for a single individual founder to do it all; even if we found that incredibly capable individual, the investment would be too risky)
- A successful founding team will embody a number of rare qualities (the team must have absolute trust in each of the co-founders; they should be confident in their abilities, needs and expectations, yet humble enough to know that they will face adversity and have to forge ahead; they must be capable of executing fast and hitting markets hard while understanding that customers can be a valuable source of feedback which could cause changes in product or direction; they must be willing to release early versions of their product, gather feedback, re-release their product, gather more feedback, etc. – essentially adopting the lean start-up methodology; they must be willing to fail fast and move on to the next iteration, next product or even the next venture; they must be open, honest, candid and extraordinarily resourceful; at least one, hopefully all, should have significant leadership abilities; we’re also really interested in what’s motivating each member of the founding team)
- A successful founding team will create a culture that attracts the best and brightest (open; honest; no politics; mutual respect; meritocracy; engineering-oriented; customer-focused; work hard, play hard; obsessed with measurements and metrics; value quality over quantity; consistently deliver superior products on time; meetings are consensus driven with the understanding that “agreeing to disagree” is consensus; fast decision making is leveraged as a competitive advantage; appreciation for action over analysis paralysis; everyone is focused on cost efficiency; the ultimate goal is to have fun creating an awesome product while making truckloads of money to better the world in some way, shape or form!)
- Founders “tough questions” have been addressed (equity split has been agreed upon; course of action to be taken if a founder decides to leave the company has been agreed upon; reasons a founder can be terminated have been agreed upon; conceptual exit value and strategy have been agreed upon; strategic decision making process has been agreed upon; operational decision making process has been agreed upon; cash investment expectations have been agreed upon; full-time or part-time arrangements have be agreed upon; founder compensation has been agreed upon; whether or not founder non-compete clauses are required has been agreed upon; founders have signed over all intellectual property to the company; there are no “lost founders”)
- Cultural fit for us (we are a jeans and t-shirt, roll up your sleeves, kick ass and take names while having fun investor; we like to invest in companies that we think we can add value to; whether it’s our experience in fundraising, due diligence efforts, corporate strategy, technical strategy, complex sales, engineering, or some form of research, we are looking for opportunities to add value in addition to our investment; if this isn’t what you’re looking for, we’re not a good fit; we believe that the money invested is worth far less than the mentorship and help we provide)
Basically, when speaking to the founding team, the words that should come to our minds include: trustworthy, confident, intelligent, motivated, passionate, capable, knowledgeable, humble, inspiring, and fun to be around!
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When evaluating technologies, what do you look for?
We understand that, in many cases, you aren’t going to walk through our doors with much more than an idea and a presentation or a basic product demo. Even with that understanding, we expect that you’ll have thought through some of your product’s details based on how you think it will evolve.
When discussing technology, there are a common set of attributes that are typically considered (this holds true whether discussing websites, applications, networking equipment, etc.). Although this list isn’t meant to be all inclusive, you should be prepared to talk about the following:
- Reliability (think in terms of availability over time; example: 99.999% availability, which is the traditional bar set in telecommunications and equates to approximately 5 minutes of downtime per year; it’s important to note that availability is not the same as “uptime” because a system or network may be “up” but not necessarily available – for example: power on but not accepting connections; you may not have any real numbers, but you should at least know the expectations of the market you are targeting)
- Scalability (think in terms of maximum growth; examples include: maximum number of simultaneous user connections per server instance, maximum number of server instances running on a single physical or virtual server, maximum number of entries in a route table, maximum number of nodes in a network, etc.; you should also understand whether these scalability limitations are hard limitations or soft limitations; once again, you may not have any real numbers, but you should at least know the expectations of the market you are targeting and how you’ll stack up against the competition)
- Performance (think in terms of responsiveness, throughput, efficiency, etc.; examples include: signal strength over a range of distances, time elapsed between pushing the TV remote button and the channel changing during prime time, time elapsed between the time you touch the icon on the screen and the app opening; transaction rate during peak load, network throughput when encryption services are running, etc.; you should also understand performance based on different constraints and scenarios; again, you may not have any real numbers, but you should at least know the expectations of the market you are targeting and how you’ll stack up against the competition)
- Interoperability (think in terms of compatibility; the idea is that the new products or services purchased should be capable of working with the current installed base or the existing products or services you already own; there are business and technical pros and cons to making your products or services interoperable; “greenfield” projects are less dependent on interoperability because they are, in theory, not constrained by legacy projects; think about which versions of Android or iOS your app works with; which versions of Windows, Mac, Linux, or Sun your program will run on; etc.)
- Manageability (think in terms of ease of use: examples include how easy it is for an individual to install or uninstall your app or program; for a systems administrator to use your website, configure your product or service, monitor performance, set up security, perform accounting or administrative tasks, identify and fix problems, etc.; in network management these concepts are part of the FCAPS model: fault, configuration, accounting, performance, and security; understand that ease of use will greatly impact the overall user experience)
- Serviceability (think in terms of maintenance and support; examples include: updating the product without taking it out of service, adding new features or functionality without taking the product out of service, essentially minimizing impact to the system while making any changes; understand that, depending on the circumstance, some system changes are expected to be completed while the system remains “in-service” and available to customers; in other cases it may be acceptable for a program to require an operating system reboot or an app to require a mobile device to reboot)
- Security (think of this in terms of peace of mind; preventing intentionally malicious activity from taking place, preventing accidental actions or, fat fingering, from causing significant damage, preventing the disclosure or loss of confidential information, preventing any form of unauthorized activity; understand that trust is hard to obtain but easy to lose and this will impact the use of your product or service)
- Affordability (think in terms of cost; examples include: app cost, program cost, cost per bit per route mile, cost per byte of storage, cost per byte of memory, cost per compute cycle, cost per click, etc.; understand that you should be able to outline these numbers from an internal and external perspective where applicable; essentially how much it costs you to create your product and how much you sell it for; you may not have all of the actual numbers, but you should at least have a rough estimate)
- Design (think of this in terms of the wow factor; simple, clean, elegant, visually stimulating, intuitive, symmetrical, consistent, comprehensive, interactive, dynamic, confidence inspiring, beautiful, etc.; if these are the words people are using to describe your product or service, you’re likely on to something; if not, you’re clearly missing something)
- User Experience (think of this as the complete package; develop your product or service considering all of the attributes listed above; address the desires of a significant market; assemble the right team to attack the market; soon you’ll attract “fanboys” like Apple or create “the ultimate driving experience” like BMW)
As an early stage start-up, you’ll hear “rapid application development”, “iterative development”, “agile development”, “rapid prototyping”, “lean start-up methodology”, etc. Much of this is focused on speed and having the opportunity to quickly test a market and either fail fast or forge ahead.
While we understand and agree with many aspects of the “fail fast” concept, we would however, like to add a cautionary note: If you are “too fast” and overlook some of the concepts described above, significant flaws may not be caught in your early stage, highly successful tests that typically take place in limited or controlled environments. These significant flaws and issues will arise at the worst possible time: when your product or service starts to gain momentum and you get traction in your target market. Suddenly, you won’t be able to scale to meet demands, performance will become unbearable, product or service availability will decline, etc. If you’re lucky, the fixes will be manageable, if not, you may be looking at a complete re-architecture or complete re-design.
Keep the above list in mind and hopefully you’ll avoid some of these issues.
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When analyzing markets, what do you look for?
First, let us start off by stating that no matter how good your market analysis is, the chance of it being even remotely right is extraordinarily low. From the time you think about all of this, gather all of the information, analyze the information, create the slides, present the slides, get your funding and hit the market… it’s likely that your product will change, economic conditions will change, market dynamics will change, pricing strategy will change, the competitive landscape will change, etc…
Don’t, however, let this discourage you and here are the two primary reasons why: (1) conducting this analysis will help you better understand the market, determine where your product really fits, and offer insight into your go to market strategy and (2) this analysis will provide investors insight into your analytical abilities and just how business savvy you really are.
Understand that the basic premise of a market analysis is the same no matter which market you target (individual consumers, private companies, government entities, etc.): we really just want to know how big the market is and how much of it can we capture.
Although not all inclusive, these are the topics we’re thinking about and hope you are too:
- Market Size (think about the absolute size of the market; let’s say you’re looking to sell a product to women between the ages 18 and 44 in the United States; 2010 US Census tells us that there are approximately 112.8 million woman in this category representing 36.5% of the total US population; this group has grown 0.6% in the last 10 years; http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf)
- Regulatory Considerations (for the sake of this over-simplified exercise, let’s assume that there are no regulatory considerations for your company; examples could include: Cyber Intelligence Sharing and Protection Act, Stop Online Piracy Act, Protect Intellectual Property Act, Digital Millennium Copyright Act; this is only going to get more complicated)
- Geopolitical Considerations (let’s assume that there are no geopolitical considerations for your company; this will, however, become more and more important for start-ups to look at, especially if they intend to launch globally; examples could include: product or service intersection with foreign policies or trade in the form of encryption, greenhouse gases, digital currencies, tax optimization, etc.)
- Distribution Channel (think about how you’re going to reach these customers; let’s say you intend to use the internet; 2009 Census tells us that 76.7% of the population has internet access; roughly speaking, your market is now 86.5 million; this clearly is not an exact science, but you get the picture; http://www.census.gov/hhes/computer/publications/files/2009/tab01.xls)
- Distribution Limitations (maybe your website is English only or it requires broadband internet access; 2007 US Census tells us that roughly 7% of this population speaks English “less than very well”; we’re down to 80.4 million; http://www.census.gov/hhes/socdemo/language/data/acs/ACS-12.pdf)
- Effectual Demand (everyone might want your product, but can everyone afford it; let’s say your target customer has a household income of $100k+; this is approximately 21% of all US households; we’re now around 16.8 million; http://www.census.gov/hhes/www/cpstables/032011/hhinc/new06_000.htm)
- Total Addressable Market or TAM (there are a number of additional ways to narrow down your market, but once all the “narrowing down” has been done, you’ll be left with your total addressable market; for the sake of this little exercise, we’ll use 16.8 million people; let’s also assume that the average unit price for comparable products to yours is ~$200; the current total addressable market is $3.36 billion; if you didn’t follow that, all we did was multiply the 16.8 million people by $200)
- Serviced Addressable Market or SAM (these are the people within the total addressable market that have already been serviced by your competitors solutions; after doing some research on competitive products and services, you’ve found that 22%, or 3.7 million people, are already being serviced; of the $3.36 billion total addressable market, $740 million is already being served; If you didn’t follow that, all we did was multiply the 3.7 million people by $200 arriving at $740 million)
- Service Obtainable Market or SOM (this is the segment of the market that you can capture with your product; this is the remaining 13.1 million people valued at $2.62 billion; all we did was subtract the $740 million from the $3.36 billion; of course this assumes that your product is ready and you’ve already hit the streets with your sales team; if not, to arrive at this number you need to consider issues such as the rate at which your competition is capturing market share, the amount of time that it will take for your product or service to be ready, your new product introduction strategy, your expected market capture rate, etc.)
- Target Market (based on your development schedule and all of the market research, you’ve determined that you can realistically capture 10% of the SAM because customers are unhappy with their existing products and have already expressed interest in yours – this represents 370,000 people and ~$74 million; you’ve also determined that you can capture 35% of the SOM based on projected adoption and growth rates over the next 3 years – this represents ~4.6 million people and $917 million; your target market is ~5 million people and is worth ~$1 billion; clearly this assumes the same price structure of $200; if you change the cost structure, the number of people and the market size will likely change)
- Targeted Early Adopters (think about the people who have the most influence over your target market and have interest in your product or service; be creative and find a way to turn them into evangelists; these highly influential evangelists may be able to help you shorten sales cycles and gain market share; this strategy may not be right for everyone but it is worth considering)
- Go to Market Strategy (how and when you’ll launch your product or service; creatively use social media- Blogs, Facebook, Linked-In, Twitter, Foursquare, etc.; determine whether you need a classical marketing campaign; determine whether your sales organization needs to be structured geographically, by product line, by customer type, etc.; prioritize your sales efforts to “get the most bang for your buck”; think about “beach head customers” or “marquee customers” and how they can be landed and leveraged; think about how these decisions will scale as your business grows; leverage your network as extensively as possible)
- Competitive Landscape (claiming that you have no competition is usually a big red flag stating that you don’t understand your market; if you really don’t have any competition, the next question is whether or not the market really exists or why nobody else is going after it; if you do have competition, how do you stack up, what are your differentiators, how will you compete, how will your competitors react)
- Financial Analysis (a complete breakdown of the cost associated with your product or service as well as all of the associated costs required to run the business; determine how your finances will stack up against your competition: sales price for product or service, product or service cost structure, gross margin, operations costs, operating margin, profit margin, assets, liabilities, cash flows, etc.; this will help you understand what is required to become financially viable and competitive in the marketplace)
- Key Trends & Expectations (is the wind at your back or is the wind in your face; include historical, current and future data as well as context for as many of the attributes listed above as you can; look 3 to 5 years into the past as well as 2 years into the future; understanding that history may not be a good indicator of the future, do you have expectations that any of these trends will change; if not, why not and what could be the catalyst for the change; if so, why do you think the time is now or whenever you’re predicting)
- Assumptions (assumptions are typically given a bad rap, but the reality is we all need to make assumptions when markets are immature or when products haven’t been fully tested; it’s really the basis of an assumption that make it poor; when you do make an assumption, it’s best to list the assumption as well as the foundation which it was built upon; this will enhance your credibility as well as open up dialog)
Keep in mind, the example above is an extreme over-simplification and is meant to provide some basic guidance. Think these items through and provide a solid, realistic analysis backed up by credible source data. Provided you have a great team and a great product, we’ll be spending time working all of these angles with you anyway.
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Which do you think is most important: team, technology or market?
While it’s fashionable to immediately claim that the team is most important, we’re going to step out on a limb here and suggest that the team and market are equally important while we’d be willing to compromise on technology.
Here’s our rationale:
- A superior team can attack a huge market with a “good enough technology” (we love this approach; in many cases this points to a low cost, simple product that enters the lower bounds of a large market and gradually increases market share as the product matures; this works because the “good enough technology” may gain enough market share and lead to an acquisition with no further development, or the “good enough technology” can also bring in enough revenue from the lower bounds of the market to reinvest in development to capture additional market share as it becomes a “superior technology”; ultimately these companies either get acquired or become self-sustainable; think about the Innovator’s Dilemma, the Innovator’s Solution and low-end disruptions)
- A superior team can attack a huge market with a “superior technology” (this is a viable option, and it’s an approach we’ll back only if we know the founding team, are co-investing with a venture capital firm, and are confident in the founding team’s ability to hit what is likely to be a very narrow market window; in many cases this points to a higher cost, higher performance product that enters the higher bounds of the market and gradually increases market share through cost reduction programs or by the willingness of the consumers to move “up market”; the real challenge here is that the creation of a superior technology is usually a very expensive endeavor; in an effort to claim superiority, companies can become a victim of a “feature war” and succumb to competitors with significantly more research and development dollars; even if moderately successful, the potential to turn into an “also-ran” is quite high; think about high-end disruptions)
- A superior team can attack a small market with a “good enough technology” (this is a viable option, but it’s not an approach we invest in; we view this as a great approach for entrepreneurs looking to launch “lifestyle companies”; in many cases this points to a low cost, simple product that enters the lower bounds of a market that is too small to ever warrant an acquisition or initial public offering, yet it is big enough to sustain a small company or sell to another “lifestyle entrepreneur”; this works because the “good enough technology” may gain enough market share to bring in enough revenue from the lower bounds of the market to reinvest in development to capture additional market share as it becomes a “superior technology”; ultimately these companies must become self-sustainable; think Innovator’s Dilemma, the Innovator’s Solution and low-end disruptions; these types of investments are outside of our investment scope)
- A superior team can attack a small market with a “superior technology” (this is a viable option, but it’s not an approach we invest in; in many cases this points to a higher cost, higher performance product that enters the higher bounds of the market and is largely dependent on a small group of fickle customers; there are a number of real challenges here as the creation of a superior technology is usually a very expensive endeavor, there will be little opportunity to drive cost reduction programs based on economies of scale, market share gains will likely be dependent on the willingness of consumers to move “up market”, and in an effort to claim or maintain superiority, companies can become a victim of a “feature war” and succumb to competitors with significantly more research and development dollars; there’s too much risk here for us; these types of investments are outside of our investment scope)
- An average team can attack a huge market with a “good enough technology” (this is also a viable option, but it’s an approach we rarely invest in; this is the option that the vast majority of investors are aware of, but choose not to articulate because it is such a touchy subject; if you’re willing to be honest, you probably know an average founding team that has achieved success this way; this points to a low cost, simple product that enters the lower bounds of a large market and gradually increases market share as the product matures; this works because the “good enough technology” may gain enough market share and lead to an acquisition with no further development; the real challenge here comes if the company isn’t acquired during the period of time when the “good enough technology” is gaining traction; it’s likely that the average team will not be able to effectively manage the business or continue development to create a “superior technology”; in some cases team members can be replaced to “take it to the next level”)
- An average team cannot attack a huge market with a “superior technology” (we’re not aware of any average teams that can create superior technologies; are you?)
- An average team cannot attack a small market with a “good enough technology” (this may be viable for a very short period of time but it’s not likely to be sustainable; this is also not an approach we invest in; it is unlikely that the team will be able to effectively manage the business or continue development to create a “superior technology”; in some cases other “lifestyle entrepreneurs” may be able to come in and “take it to the next level”)
- An average team cannot attack a small market with a “superior technology” (again, we’re not aware of any average teams that can create superior technologies; are you?)
We hope this explanation helps. Just to be clear, we prefer to back superior teams going after a huge market with a “good enough technology” having adopted a “lean start-up” approach. We’re also willing to acknowledge that average teams can also succeed by taking this approach if they get the timing right or if they’re willing to hand over the reins to a superior team. In either of these cases, the founding teams and the investors can succeed.
Outside of team, technology and market, what else are you looking for?
- Corporate structure (incorporated in Delaware as a C-Corp; lawyer works at a firm on our list and is a member of the appropriate practice; accountant works at a firm on our list and is a member of the appropriate practice; founders are on a standard vesting schedule – meaning 25% of their shares vest in 1 year and the remaining 75% vest monthly over the following 36 months; 83(b) elections have been signed and filed; company owns 100% of its intellectual property; all legal and accounting documentation is in order and available for review; all of this may not be in place when we first meet, but this would be the expected structural direction)
- Technical industry (our primary focus is on “big data”, financial services technologies, internet, networking equipment, software and telecommunications; it’s highly unlikely that we would stray from these industries )
- Seed stage (our primary focus is on companies seeking between $10,000 and $50,000 US Dollars to build a demo or a prototype; our investments are structured as preferred stock; we expect an ownership stake of between 2% and 10%)
- Product Solves a Problem (a small enough problem that development is manageable and you’re not trying to be all things to all people or competing on a feature by feature basis with a much larger competitor; a small enough problem that “the big competitors” may be over-looking it or intentionally not focusing on it; a small enough problem that you can clearly articulate your key differentiators and value; a big enough problem that it impacts a large market and can ultimately represent a significant opportunity; a big enough market that your initial customers will easily identify, or associate themselves, with it)
- You actually need funding from an angel (there are a number of alternatives including bootstrapping, government grants, bank loans, customer financing, partnerships, etc.; realize that we aren’t looking for long term annual dividend streams; we’re not looking to fund “lifestyle companies”; we want to make sure that the path you choose is right for you and right for us; we must see exit potential)
Remember, one of the biggest items for us is culture. We like to invest in companies that we think we can add value to. Whether it’s our experience in fundraising, due diligence efforts, corporate strategy, technical strategy, complex sales, or some form of research, we are looking for opportunities to add value in addition to our investment. We expect that our mentorship and help will ultimately be worth far more than the money we invest.
Will you read my business plan or sign my non-disclosure agreement?
At this stage of development, we don’t believe that it’s worth writing a business plan. We generally feel that a business plan is an antiquated document that serves little to no purpose, and we don’t read them. We prefer that you initiate contact either: (1) directly because we already know you, (2) through someone we know, (3) through a start-up incubator we are working with, (4) at an event that we are attending, or (5) through email.
We absolutely do not sign non-disclosure agreements (NDAs), no exceptions, don’t ask. There are a number of reasons: (1) we’re not interested in spending more time with lawyers marking up NDAs for companies that we may never invest in – it’s just not a good use of our time or money, (2) if we did sign an NDA, we wouldn’t be able to reach out to other angel investors or venture capital firms to see if they’d also be willing to invest in your company – clearly this isn’t good for either of us, and (3) we would have to track all of the NDAs and potentially have to turn down meetings with other founding teams that are going after the same market with similar ideas – we’re just not interested in these kinds of administrative and legal headaches.
However, if you want to send us an email, here’s what you should include:
- Subject line (subject line should read something like: Spoke with XXX from YYY – this will work if XXX is someone we know and YYY is a company or start-up incubator we already work with; Follow-up from ZZZ – this will work if we met at an event; or XXX co-founder of ZZZ – this will work for a cold email)
- Email body (introductory paragraph: include your name, your role, the company name, and specifically why you think we’re a fit; second paragraph: one or two sentences about each member of the founding team; third paragraph: three or four sentences about the market, the problem you are solving and how painful the problem is for your target customers; fourth paragraph: two or three sentences on your technology and how it cures, or will cure, the pain; closing paragraph: the best way to reach you and what days and times work best)
- Email attachments (executive summary if you have one; link to a product demo if you have one)
We understand that the NDA topic is a touchy subject for some of you, but we’d rather you are aware of our stance up front. We also hope that you understand our position. The truth is, this is a relatively small community and reputation is king. Betraying potential or existing portfolio companies or members of the founder community is a surefire way of putting ourselves out of business. We have no intention of doing that.
Do you prefer demos, presentations or both?
If you have a product demo, we want to see it! We don’t expect you to have one though. At this stage of development, we understand that you’re probably seeking funding from us to build your demo or prototype. If that’s the case, just put together a presentation.
Here’s what your presentation should include:
- Title slide (your company logo if you have one, the names of the founders and the date)
- Agenda slide (the first bullet should state something like: “2 computer scientists from Company XXX & 1 executive from Company YYY”; the second bullet should be something like: “Target market of $X over Y years”; third bullet should be something like: “XXX Product that solves YYY”; fourth bullet should be something like: “Seeking $X to build demo or prototype”; basically, set the expectations immediately and let’s get excited)
- Team slide (one paragraph on each of the founders that includes all relevant, impressive information; include a picture of each founding team member as well)
- Market size slide (total market size, portion of the market already being catered to; portion of the market still available; portion of the market you are targeting; value of your target market over time)
- Market analysis slide (who are the competitors, how much market share do they have, how fast are they growing, regulatory risks, geopolitical risks, trends, etc.)
- Market pain slide (what problem are we addressing, why does anyone care, how painful is the problem, why does this pain exist, why isn’t anyone addressing it, how valuable is the cure)
- Technology solution slide (how you intend to cure the pain, what you need to get there)
- Technology thought process slide (why did you choose that approach, thoughts on reliability, scalability, performance, interoperability, manageability, serviceability, security, affordability, design, and user experience)
- Go to market slide (what distribution channels are available, thoughts on go to market strategy)
- Progress slide (when the company started, key milestones to date, status of corporate structure, status of technology, any interested potential customers, etc.)
- Big ask slide (exactly how much money are you looking to raise, what do you intend to use it for, how do you think we can help)
- Contact slide (contact information for the founders so we can get back to you)
We understand that you might not have all of this information, but we’re really looking to better understand you, your thought process, your view of the market, your view of the market pain, your view of the solution, and what you think it will take to get there.
How many angel investments do you plan on making this year?
Our goal is to invest in approximately two or three start-ups every year. This may seem like a small number but we are very selective and expect to spend a significant amount of time mentoring and helping each company we invest in. At this point, we honestly don’t believe that we have the capacity to handle more than three companies per year and we’re not willing to sacrifice the quality of our mentoring to increase the number of investments we make.
See our Start-up Mentoring page for more details.
Do you structure investments with convertible debt or preferred equity?
We believe that preferred equity better aligns the interests of the founding team and the angel investors. We know that there are a number of arguments in support of convertible debt so we’ll explain the rationale behind our preference.
- Preferred equity better aligns the founding team and angels when negotiating a Series A round (when using preferred equity, both the founding team and angels are seeking a high valuation; when using convertible notes, the founding team is seeking a high valuation while the angels may seek to limit the valuation to maximize their conversion discount; we’d rather be aligned with our founding teams from the moment we meet them to the last exit we complete with them)
- Preferred equity is not more complex than convertible debt (the big issue here is valuation; it’s not hard to figure out our valuation ranges when we tell you that we’re looking to invest between $10k and $50k and expect to own between 2% and 10% of the company; the simplicity argument really goes out the door when the angels and founding teams start trying to negotiate caps and floors for future funding valuations; if the most complex aspect of our relationship is valuation, we have problems anyway; let’s keep it simple from the start by agreeing on a fair valuation and progressing together as a single unified front)
- Preferred equity is not more expensive when it comes to legal fees (historically the legal fees associated with preferred equity were higher; today, many of the forms have been turned into standardized documents and the difference is effectively $0; we’d recommend reaching out to the lawyers listed in our resource library if you’d like further clarification or information; if, for some reason, there happens to be a price difference for the legal fees, we’ll be sure to pick up the tab)
- Preferred equity does not create liabilities for the company (convertible debt is a liability; it is a company debt owed to creditors; preferred equity is not a liability and helps the company maintain a healthy balance sheet; we don’t intend to initiate our financial relationship with a company by increasing its liabilities)
- Preferred equity provides us the opportunity to participate in the company’s success along with the founding team (we don’t provide bridge loans to fill short term gaps; we don’t expect to be passive investors in any deal we do; we fully expect to provide more value to the company with our mentoring rather than just the money invested; we believe that preferred equity is the best way for us to maintain complete alignment with the founding teams and the most fair way for us to participate in the upside if we’re all successful)
We never say never, but, based on our culture, we feel preferred equity is the right structure for us. If you have a compelling reason as to why convertible debt makes more sense, let us know. We’re not saying that we’ll agree, but we’re willing to keep an open mind.
Do you have a ‘dirty dozen’ book list for founding teams?
Strategy & Innovation
Christensen, C.M. (1997). The Innovator’s Dilemma. Boston, MA: Harvard Business School Press.
Christensen, C.M., & Raynor, M.E. (2003). The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press.
Sawyer, R.D. (1994). Sun Tzu: The Art of War. Boulder, CO: Westview Press.
Blank, S.G. (2007). The Four Steps to the Epiphany: Successful Strategies for Products that Win. Cafepress.com
Furr, N., & Ahlstrom, P. (2011). Nail It then Scale It: The Entrepreneur’s Guide to Creating and Managing Breakthrough Innovation. NISI Institute.
Reinertsen, D.G. (2009). The Principles of Product Development Flow: Second Generation Lean Product Development. Redondo Beach, CA: Celeritas Publishing.
Ries, E. (2011). The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. New York, NY: Crown Business.
Sales & Marketing
Dixon, M., & Adamson, B. (2011). The Challenger Sale. New York, NY: Penguin Group.
Moore, G.A. (1991). Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. New York, NY: Harper Collins.
Moore, G.A. (2005). Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. New York: Penguin Group.
Osterwalder, A. & Pigneur, Y. (2010). Business Model Generation. Hoboken, NJ: John Wiley & Sons.
Feld, B. & Mendelson, J. (2011). Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist. Hoboken, NJ: John Wiley & Sons, Inc.
Peters, B. (2009). Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists). Canada: MeteorBytes Data Management Corp.
We know that we mentioned a “dirty dozen” and you expected 12 books. Instead, we provided a “baker’s dozen” and offered you 13. Clearly this is better than a “banker’s dozen” where you are offered 12 and provided 11.