Boring can be sexy....in business

This statement doesn't apply to life and interactions with the opposite sex. But I've been pitched two pretty boring ideas by really good entrepreneurs and I thougth that both businesses had the potential of being pretty sexy and attractive.  The first one had to do with online manuals for products and the second had to do with backend plumbing and glue for email.  See what I mean -- boring stuff.  Yet, each entrepreneur saw something unique in these starting points that made me interested to follow the progress of the company over the next 6 months.  While these businesses might turn out to be nothing -- I'm guessing there's actually likely something there.  One of the big challenges for both entreprneurs will be in making the boring sexy to customers and to investors. 

the game is changing

I'm speaking on a panel next week as part of the MIT Enterprise forum here in Seattle. The topice of the talk is Venture Funding - It's a New Game. The game has for sure changed, and I think the success of Founder's Co-op, TechStars and Lighter Capital shows some of the ways entrepreneurs and investors are adjusting. 

The panel is a good mix of people across the startup funding landscape, with a wide range of experiences. I think it should be a really interesting talk, so no matter where you sit in the startup funding world (entrepreneur, investor, service provider), I think there will be some juicy nuggets you can catch here. Check it out next week - details below.

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Have you heard about recent exits in which start-ups have been acquired for several million dollars within a couple of years of founding with little or no outside investment? Or clean energy start-ups that can’t raise the millions needed to grow their business? Or a game company that sold for hundreds of millions of dollars with relatively little VC participation? What’s going on? 

Join us as Rebecca Lovell, Chief Business Officer at GeekWire, moderates our panel of industry insiders including:

• Frank Artale, Partner, Ignition Partners
• Tom Duterme, Corporate Development Director, Groupon
• Andy Sack, Co-founder of Lighter Capital, Judy's Book and several acquired tech companies
• Dan Shapiro, Kept Entrepreneur at Google

Our panelists will tell us where acquisition and venture money is coming from today, including specific deals. They will explain new venture funding models such as revenue financing and incubators that offer mentors, connections to investors, and significant cash. More importantly, they will provide a framework for understanding how funding in the Northwest has been transformed by increased capital efficiency, technological development, and the global economic malaise, as well as explain the impact on entrepreneurs and funders, such as angels, VCs, and corporations.  

Audience Takeaways

Audience members will learn:

• Details of recent Northwest exits and financings
• What has changed in the last two years
• About the explosion in new ventures and trends in capital efficiency
• What acquirers and investors are looking for today
• What is hard to fund and why
• About new venture funding models such as revenue financing and incubators with advisors, connections to investors and cash

How Founder's co-op is helping Seattle?

This may be a repeat for some of you, and is a bit self promotional....but Mark Suster (General Partner at GRP in Los Angeles) wrote a thoughtful piece in TechCrunch yesterday about the startup scene here in Seattle, including a very generous mention of what we're up to here at Founders Co-op. 

Last night I was fortunate enought to be voted Best Angel / VC Investor at the Seattle 2.0 Awards. I am truly honored -- and feeling undeserving. I will work harder to actually earn this award. There are lots of more experienced and better vc's than I in Seattle -- They may not be as good at promotion but when it comes to making great bets on great companies I still have a lot to prove.  I'll get there though. Thanks for the acknowledgement. 

FirstMark Capital is spamming our companies with this email

Everyone one of the CEO's in our portfolio got an email like this.

Hi [CEO NAME],

Hope this note finds you well.  I’m with FirstMark Capital, a $2B venture firm based in New York City.  A friend of mine who runs a startup here in Manhattan shot me a note to check out [COMPANY NAME] over the weekend, and I had chance to spend some time on your site last night.  I found your [SITE DESCRIPTION] to be really interesting, and thought that your company seemed to mesh well with several of the investment verticals that we focus on as a firm.  I’m not sure if you’re familiar with FirstMark or not, but we invest in early-stage tech companies in a number of sectors like emerging media, retail/commerce, vertical apps & services, and infrastructure software, among others, and count a number of awesome companies like SecondMarket, Shopify, Clickable, Knewton, and Riot Games as current investments.

If you’ve got a few minutes sometime this week or next, I’d love to connect and learn more about your company as well as introduce you to FirstMark and tell you more about some of the ventures and initiatives that we’ve been involved with recently.  I look forward to hearing back on if and when you might be available.

Best,

Paul

No harm in this really....just kind of funny.  And thought I'd call it out. Sincere inquiries like this are always welcome and it's hard as a CEO to sort out the wheat from the chaffe. It might be worth a follow-up call if you see a fit but be aware that it's not all about their love for your unique business ;)

When money = relationship

I had an entrepreneur in my office that I've been working with for a few years. He's took a small angel round that I'm an investor in. The business has taken longer to get off the ground and in the last 6 months they're really starting to make strides. That said, the company is running out of cash and is about 10 to 15K per month from breakeven. Yesterday, he was in my office talking about raising 50K to get him to breakeven. I told him he should try to raise 200K so he can play for success. The terms of the 200K are going to be tough to the company and existing investors. The entrepreneur is doing all the right emotional things to make the company a success. He could easily throw in the towel and call it a "lesson learned". Instead, he wants to plow ahead. In the meeting, he told me he was committed to seeing this company through to success. In that moment, without knowing the terms of the deal, I told him that if he was in -- then I am committed to participating in this next round (personally and not as a fund). It was the right thing to do. And fortunately, I'm in a position to be able to do that.  In that moment -- money equaled relationship and support.  And fortunately for me -- I didn't miss the moment. There have been plenty of times where other friends I've worked with in the past have asked me to invest and support their ventures financially and for whatever reason -- I missed the moment when money equals relationship. This is a rare and important moment when even a little money gives the right emotional support and solidarity to help an entrepreneur. I suspect that this applies to famliy matters as well -- but tomorrow -- time willing, I'll write about instances where I have missed this opportunity...and how it bums out the asker as well as me. 

Should more angel investors consider a royalty based investment model?

I just answered this question on quora -- please vote it up here.

I absolutely think that royalty and revenue based finance should be considered by angels and funds. Ok -- I'm biased. I'm so convinced that revenue based finance is important that I started a company called RevenueLoan in addition to my equity orient Seattle based angel fund Founder's Co-op to pursue this model. Why? Because I think that there are lots of instances and lots of companies where this model is preferable for the entrepreneur than straight equity. Let me explain, revenue based investments have the following benefits when compared to straight equity:

1. Generally, revenue based investments are cheaper for the entrepreneur than straight equity. Often, significantly cheaper. If you think about selling equity -- often that's for 20% of the company. One can think of that equity sale as a 20% perpetual royalty.
2. Revenue based investments don't involve significant control provisions. Entrepreneurs who don't want the hassle of dealing with investors on the board of directors are attracted to royalty based finance.
3. Revenue based investment align entrepreneur and investor incentives in growing revenues and growing the revenue line and thus, growing the business. This is GOOD! And the right focus. When the entrepreneur and business increase sales, the entrepreneur wins and the investor wins. When growing sales takes longer, the entrepreneur isn't punished. This is GOOD!
4. The main objection to revenue based investments in my opinion revolve around the precious commodity of cash and not profit. It's true, revenue based investment require the company to have sufficient margin to pay them off and they take precious cash out of the company. That said, no investment is free and the benefits of revenue based investments far out weigh the costs.

In short, in my opinion, royalty and revenue based investments are a great tool for angels to have in their tool chest.  

Just my -- albeit biased -- $0.02.

Naked Juice with Vulcan Steve Hall ....interpret that!

  
A picture or two should help you interpret the post title.  
I had coffee and juice with Steve Hall yesterday. Super fun. Steve is a really smart guy who understands where technology and business intersect. He convinced me to try evernote. It's the third software product for the week I'm going to give a trial month to -- Quora, Evernote, and The Shared Web.

In my opinion, the rate of change of the web seems to be increasing. I can't keep up with all the new ways to post, share, and consume.  Can you?  

Lunch with Greg Gottesman

 
 
Had lunch today with Greg Gottesman of Madrona. We ate at Portage Bay Cafe and I had a great cheeseburger. We debriefed on the past class of TechStars in Seattle as well as Founder's Co-op and RevenueLoan. We also chatted about PHPfog a deal that both founder's co-op and Madrona participated. Thanks to Greg for his help with TechStars and for paying for lunch. 

An inbound email to RevenueLoan

I thought I'd share this from an inbound email inquiring about the possibility of a RevenueLoan:

"We are not interested in dilution at this time, we have no venture and would prefer to keep it that way. Hence, flexible financing against our future subscription payments is very attractive. We have a major product launch (product is entering beta) at the end of this year and this will require additional funding upfront."

On the surface, this sounds like there may be a fit....look forward to talking to this entrepreneur!

Open Angel Forum and TechStars DemoDay in Seattle - be sure to register now!

As many of you know, I'm busy trying to cultivate the start up scene in Seattle!  Thus, my endeavors -- Founder's Co-op, RevenueLoan, and TechStars.  I am deeply passionate about helping entrepreneurs and early stage companies get capital to grow!  

About a year ago, I became aware of an initiative run by Jason Calacanis called Open Angel Forum (OAF).  The program tries to marry high quality angels with high quality angel investment opportunities at NO cost to the entrepreneur.  This kind of event resonated with me a lot - I attended OAF in Boulder and thought it was great! I've known Jason since the 90's and I recently agreed to host Open Angel Forum the night before TechStars DemoDay in an effort to attract more angels to the Seattle event.

So it's my pleasure to announce --  two exciting angel events for investment opportunities in Seattle – ever! Hosted back-to-back on purpose, this is going to be a two days of angel and entrepreneur events in Seattle!  These events are invite only so follow instructions below!

I) November 10^th – Open Angel Forum, 7pm.

Join Jason Calacanis, myself and many other angel investors for the first meeting of the Seattle chapter of the Open Angel Forum!   We'll have food and drinks while hearing 5 minute pitches from 6 start up companies.  We're planning for plenty of fun and time for networking - even a poker game after!   Register online here: Angels, Entrepreneurs, Service Providers. 

II) November 11^th – TechStars Investor Day, 9am.

Ten exciting new companies from the TechStars class of 2010 in Seattle will give short eight minute presentations highlighting the business and investment opportunity. The style is fun and entertaining, it's a different kind of pitch event that includes amazing opportunities for networking as well.  This event is invitation only and registration is required. Please email kayla@techstars.org if you’d like to attend or if you have any questions.

Playing "hot or not" with investors

This morning I was recapping with the TechStars founders about their first 2 weeks and preparing them for what to expect in the next 11 weeks and beyond.  One question raised is how to deal with raising funding.  In addition to some other advice I offered, I made a strange analogy:

A key part of getting financing is managing your reputation: gaining traction and momentum in the technology and venture community is like....becoming the popular kid at school. 

In high school, I learned (the hard way) that if Jane tells Cindy that Tommy is "hot," it influences Cindy's view of Tommy and after this occurs a few times....guess what.... Tommy becomes the most popular (i.e. hottest) kid in the class.  This high school process of "who is the hottest" is pretty similar to what occurs amongst investors with startup companies.

In addition to developing a great product that customers want to use, having a business plan, and being able to pitch well etc., it is equally important to generate strong buzz about your company among the venture and technology community.  Sometimes an off-handed remark at a cocktail party from one angel to another saying "have you seen what XYZ company has been up to? It looks cool (i.e. hot) to me" is all you need to get your company some traction with investors.

The story behind RevenueLoan...and why I'm excited about the company

I started RevenueLoan because I am on a mission. I have a passion for entrepreneurship. I've been starting and running technology companies for 15 years now.  I love entrepreneurs and generally find myself spending all my time trying to help them with all aspects of their business. 

Why do I do this? Well, two reasons. First, I received lots of help as a young entrepreneur. I wouldn't have been nearly as successful had it not been for the help and mentorship of lots of kind friendly people. Second, I believe MANY people aspire to be entrepreneurs and to build something that they and their employees believe in and can be proud of. To accomplish this goal, financing is a often a core impediment to realizing small business success and growth. 

Two and half years ago My partner Chris DeVore and I started Founder's Co-op because we thought that the traditional venture capital model was broken.  We thought success for a startup company was better facilitated by a super angel entity than by a traditional vc fund. We continue to believe this....and are in the process of proving it! I want to be clear -- this does NOT mean that I think venture capitalists suck or are useless. On the contrary, venture capitalists play a vital role in the startup process. 

During the first year of operating Founder's Co-op, we perceived another opportunity to support a group of underserved entrepreneurs. These entrepreneurs had small businesses and big visions and were impeded because they didn't fit traditional bank debt or traditional venture capital or angel equity models. This market insight-- which was  facilitated by Erik Benson and the partners at Voyager Capital -led to the creation of RevenueLoan, the company. We did the first two RevenueLoan investments under the Founder's Co-op umbrella (or flag) before determining that the opportunity required a separate investment vehicle. One of those deals has already proven to be very successful for the entrepreneur and for us!  

Founder's Co-op is on a mission to innovate in the area of financing of early stage technology companies. RevenueLoan is a vital innovation.  The reason I'm so excited about the company is because I think it's the best investment agreement I know of that truly aligns entrepreneur and investor incentives.  RevenueLoan puts an extra focus on increasing top line revenue growth which for any entrepreneur is a critical success metric!

In conclusion -- and just to put a fine point on it -- I'm excited about RevenueLoan because I think it is going to help a large number of entrepreneurs grow their businesses.  

When RevenueLoan is important?

I'm personally on a mission to help entrepreneurs build their businesses and be successful.  For me that means a couple of important things:

• Stage appropriate funding
• Mentorship
• GFA - Get fucking aggressive

Over the past 2 years that I've been investing as part of the superangel fund in Seattle Founder's Co-op, I have seen that there are lots of opportunities where our operational expertise and desire to build real businesses makes a ton of sense to invest as an early stage equity investor.  However, I'ves een lots of opportunities where good companies and good entrepreneurs are in situations where $250K  (we do deals up to 500K and in special circumstances might even consider more) makes a LOT of difference and these entrepreneurs have no real source for cash. RevenueLoan was created to address these situations. Situations like the following:

• Working capital because growth is happening faster than projected
• Marketing dollars to open a new market for an already successful product
• A cash cushion that allows an entrepreneur to make operational decisions that are in the right long term interest of the business but might have adverse cash consequences in the short run: like changes to pricing
• Capital into the business when the cap table is delicate or not at a point where making drastic changes to the cap table is advantageous to the entrepreneur
• To purchase key assets necessary to or increase revenue (we've looked at funding small acquisitions)

The Big Door financing history: an insiders view of Keith Smith's comeback

Founder’s Co-op has been an investor in BigDoor since shortly after its inception in2009.  The CEO and co-founder of BigDoor is Keith Smith, and Keith and I have been friends for going on seven years now.  It is a friendship forged in the board room, sales pit and the business trenches – yet cemented over drinks and political debate.  I think there is a good lesson to be learned from Keith’s story over the past couple of years, so I thought I’d tell it.

The economic tsunami of 2008 left Keith and his company in rubble. The company that once had annual revenues north of $78MM and significant monthly profits that placed its worth well over $100 MM in market value was sold in April 2009 for for pennies on the dollar.  In an attempt to save his company, Keith mortgaged his home and poured every last dollar he had into the company.  Despite those investments, all of the proceeds of the sale went to the company’s lenders and Keith’s personal fortune went the way of his company, south….way south. 

Shortly after the company he had spent a decade building and running Keith was offered the job of CEO of an Internet company located in the Midwest doing double-digit millions per year in revenue.  He then began debating whether to take this job (and go work for someone) or begin again and start his own company.  When he sought my advice, I told him that he should do what’s right for him – that he’s captain of his own ship and needs to make the call about what direction to take his career.  I told him there’s no shame in working as a hired gun for someone else. 

Keith took a trip to Cancun with the plan that he would spend a week on the beach to make a decision about what would come next. Rumor has it that he drank a fair amount of tequila and partied hard on the beaches for a week. When he returned to Seattle, he declared he wants to start a company.   He had a vague notion of starting a company focused on offers; kind of like Offerpal but aimed at non game sites. 

I told him I’d like Founder’s Co-op to lead the financing.  My rationale was simple: I wanted to bet on Keith. I think he’s one of the best CEOs I’ve met and personally he is one of those people that knows how to make money.  He’s also someone that I’d never want to bet against. My assessment had much more to do with the attributes of Keith than with his new business. I just know he’s smart enough to figure it all out – and now he has a chip on his shoulder to prove to everyone that he can do it again. 

We decide to go to Las Vegas for the weekend and try to pencil out a deal while drinking by the pool.   The negotiation was none too hard. We both put our key limitations on the proverbial table – there’s a lot of trust between us and neither of us tried to over optimize the deal.  We left Las Vegas with the following deal: 

Founder’s co-op leads a 500K investment in Big Door

• 250K at a low valuation
• 250K in a convertible note that will be done in Nov 2010

In November 2009, Keith & Jeff and I returned to Vegas for the annual sojourn to pubcon .  On the plane, I looked back to see Keith and Jeff in a deep conversation. Jeff twisted around in his seat talking intently to Keith in the seat behind him – who is furiously taking notes.  Upon landing in Vegas, Keith & Jeff tell me they’ve decided to alter the direction of the company. I asked them lots of questions and their thought process made sense. I encouraged them in their new direction but I told them to get a customer.  Customers will validate whether their change makes sense. 

Also in November 2009, Brad Feld (Foundry Group) and Keith met for the first time at the TechStars in Seattle event.   I facilitated an introduction over a beer and a burger. 

In January 2010, Keith closed his first customer on the revised strategy: BuddyTV.  The sale of this customer is a milestone for the company. Around this time, my confidence in Keith and the plan he was pursuing  began to increase significantly. I began to see the wisdom of the change in direction that Keith and Jeff had made.  I began making introductions for Keith to a bunch of local and non-local venture capitalists.  Keith and I both knew that the company is going to need additional capital.  Fortunately, a number of the venture capitalists got interested in the company. 

In February 2010, Brad Feld started to engage more with Keith.  They began to develop their own relationship.  . Keith closed his second customer: the Cheezburger Network.  Around this time a few other venture capitalists started to request 2nd meetings with Keith and are began to express serious interest in the company –but the chemistry and momentum and fit was nothing when compared to Foundry Group. 

In April 2010, Brad and his partner Seth came to Seattle . We had breakfast and then Brad, Seth and Keith had a 2 hour meeting with Keith.  A few days later, Keith calls me from the SFO airport and tells me he ran into brad at the airport and Brad informed him that he will not be investing.  Brad really liked the company but for a few reasons couldn’t get himself off the fence to actually invest.

Keith was a bit surprised and disappointed. Frankly, so was  I.  Up to that point, the chemistry and momentum between Brad and Keith kept pointing to a likely term sheet. I kept thinking that Brad would put a termsheet down but the valuation would be too low for Keith.  I told Keith not to give up and to reach out immediately to Brad to tell him he made the wrong decision and I told him to get on a plane and get to Colorado.  Keith reached out to Brad and Brad was receptive, so they setup a meeting for later that week in Colorado.

They meet at the Foundry offices for a few hours and by the end of the meeting, Brad had tentatively agreed to change his mind. BUT, Brad wanted to discuss the investment with his partners. I encouraged Keith to keep the heat on and to email Brad’s partners and tell them how much he wants to do the deal with Foundry as opposed to other investors. 

I also told Keith he needs to work on a backup plan. Two weeks later Brad agreed to invest.   The deal closed 21 days later (i.e. last week). 

The big lesson to learn here is; never give up.  Whether you have a company that fails, or a deal that falls apart – don’t get discouraged, don’t give up, keep going. 

Join me in welcoming Geoff Entress to Founder's Co-op as a partner

I just wanted to welcome Geoff Entress as a partner at Founder's Co-op.  Chris DeVore and I are super excited to have Geoff join us. His work as an angel in the Northwest generally, and Seattle specifically is unparalleled and makes him a perfect addition to the Co-op.  As we ramp up our activities in the very early stage investing area, Geoff is a perfect addition. Geoff brings a great track record of successful deals and complements Chris and I from a personality and skill set perspective!  Special thanks to Voyager Capital in making this transition smooth from everyone's perspective -- they're very supportive of Geoff and Founder's Co-op union and we very much look forward to working together with them (i.e. Voyager) in the years to come. 

You can look forward to more news from Founder's Co-op over the next few months. 

Raising capital is an emotional process not a rational process

The other night I spoke about how raising capital is an emotional process. I can't emphasize this enough. The entire process of raising capital -- is an exercise in managing relationships.  Investors want to feel good about their investment.  Investors want to like the entrepreneur and feel confident in the person's ability to execute the business. Once you recognize this fact, below are some concrete tips for raising capital:

• Ask investors questions -- understand who they are and their rationale behind past investment decisions
• Ask questions about who they are - - where they live, what they listen to and what they watch
• Entitlement has no role in the financing process
• If you screw up, apologize
• Recognize the process is a game, play it to the best of your ability
• When your raise your money, say thank you
• If you switch investors abruptly, apologize.

Remember it's not business, it's personal .  Entrepreneurs should ignore this fact at their peril. 

Feedback from last nights twiistup event: How to make a great entrepreneurial panel or event

I spoke at an entrepreneurial panel last night with Geoff Entress. After talking and answering questions for about 1 hour I asked the audience if they had any constructive feedback on how to make the panel better. We received the following feedback:

• Serve alcoholic drinks -- Neil Patel had already figured that out and had arranged for an open bar.  I think panels are really just like weddings  -- you need to hit the audience with alcohol and good snacks immediately after the ceremony. Neil understands this.
• Improve networking -- During the drink hour, figure out a way of structuring the networking so more people meet the right people. There are lots of ways to do accomplish this -- e.g. a bell or chime where you have to move on and introduce yourself to someone new...The important thing is understanding why the audience is there is less about the panel and more about networking. 
• Improve one-on-one access to panelists -- The larger the audience the harder it to connect audience and panelist one-on-one.  In fact, making one-on-one connections is hard to do with almost any size audience. However, the audience clearly has the desire to get individual advice and contact with the panel.  NWEN has created a unique "eDate" event where they have a larger number of experts to meet for 3 minutes individually with entrepreneurs. I think this is a great idea and the event has been well received.  
• Present case studies -- people like to hear detailed stories of financings.
• Role play -- Someone in the audience wanted to "watch" a real pitch and then have the panel critique the pitch.  

What Seattle startup scene needs?

Seattle needs:

...more big exits from Seattle technology companies

Picnik was nice.  But zillow, redfin, cheezeburger and others. It'd be good if we could get some companies exiting with greater than $100 million exit club. 

....more great entrepreneurial talent

This may be the thing that creates the above exits. And this may be the thing that the city needs most and is having the hardest time developing.  The UW is great - but Seattle can't compete with universities in Boston or San Francisco.   This single bullet point is the thing that attracted me most to doing TechStars in Seattle. Recruiting great entrepreneurial talent. 

....more great angel investors. 

Geoff Entress is the Ron Conway of Seattle. And the group of entrepreneurs we've pulled together at Founder's Co-op are active. But, Seattle needs more individuals willing to take the earliest stage risk associated with technology companies.  More angels investing money means a more vibrant early stage technology scene. 

....more awesome engineers

That are not trained by local HUGE companies. Or engineers that are determined to play with code and keep playing until they figure out stuff that works for people. There can never be enough talented technical people playing with codes driven to build things of value for people.  I'd particularly like to see Seattle capitalize on it's gaming roots and become a bigger player in the virtual economy space. The folks at Big Door Media are great -- but we need more cutting edge game companies.