A tip for entrepreneurs raising money: Don't make an investor wrong

I recently had a conversation with an entrepreneur about possibly investing in his company.  The entrepreneur asked for my opinion on the opportunity.  I told the entrepreneur I was interested in the business but wasn't willing to invest yet because he hadn't brought the cost of customer acquisition down enough (i.e. he needed to innovate on marketing). 
His reaction turned me off: he spent the next 5 minutes telling me why the cost of customer acquisition didn't materially matter and why I was wrong....or focused on the wrong thing. I appreciated his spirit of argument....but I really didn't want to argue with him.  (Differing opinions are welcome but argueing is a pain in the ass)
I wanted to interrupt him and tell him that my opinion was just that -- my opinion. It's neither right nor wrong....but whatever you do, don't fight with me and position me as wrong. I'll just retreat.  It's a delicate balance for an entrepreneur to make a convincing pitch in any environment and that balance has gotten harder to maintain in this environment. However, it's all the more important to make sure you guide your investors to coming to the right conclusion -- a big part of keeping that balance is making sure that you give the investor the space to have their opinion, to change their mind, and ultimately to make a choice of whether to invest or not. 

View of a Seattle angel investor

As an investor today, I have to choose between:

  1. Making an early stage bet on a company with no revenue
  2. Buying into an existing company with a revenue stream
  3. Buying shares in a publicly traded company of choice
  4. Doing nothing

What would you do?  If you're selling me on #1, your investment in terms of company, market, product and deal pricing has to be compelling enough to get me not to do the other 3 options. 
I make this list not to dishearten entrepreneurs but to give them insight into the mindset of the people their pitching.

Flat is the new up

I just had a meeting with an entrepreneur who is trying to do a financing at the same valuation as he did a year ago. Last year, he raised 1.5MM at a 1.5MM pre-money (3.0 post).  Now, he's trying to raise another 1.5MM at the 3.0MM post money so that no-one gets hurt. I told him, "flat is the new up" and I realized that I had the title for my blog post today.  I'm skeptical he'll get the deal done at that valuation but appreciate his desire to keep everyone whole.

Define Counter-intuitive: Starting a company in the recruiting industry now

I met with Bryan Starbuck, CEO of TalentSpring, at Louisa's, my favorite coffee jaunt on Eastlake.  As we were sitting down, I asked him what market he operated in. He told me recruiting. I smiled and kindly told him that Founder's Co-op would not be a good capital source for him.  With unemployment going to 10+% in the near term, we definately didn't like the recruiting marketplace as a market to be investing.  I told him it was nothing personal and nothing about his company and that I'd be glad to listen to his pitch and see how else I might be able to help him. Well, I'll be the first to admit it -- 30 minutes later, my initial assumptions about TalentSpring were very wrong. 
After learning about what Bryan is doing, I think TalentSpring is a very interesting company with lots of potential.  Simply put, he helps big and small companies deal with the generation and filtering of resumes to arrive at a pool of 100 resumes that a human should look at and sift through.  TalentSpring uses very sophisticated algorithms and processes to filter through thousands of resumes so a human recruiter can start with the best qualified base of potential candidates.  The company charges big companies an enterprise fee which is small enough ($500K+) when considering the value of getting high quality candidates into the right positions. Even in an economy with lots of unemployment, his business makes lots of sense.
Kudos to Bryan for ignoring my initial protestations and methodically taking me through his pitch. More Kudos to Bryan for making such an interesting company with such potential.  I think Bryan may still have an issue with his cost of sale and perhaps with his valuation in this round....but he definately has the makings for a decent size business! 

No new cash for the next 12 months?!

I spoke with an entrepreneur today who used to be in the private equity world. He is trying to raise $3 million at a $12MM pre-money for an early stage environmental company. I told him that Founder's co-op would not be a good fit as a capital source. I asked him how the raise was going and he told me it was the toughest capital market he had ever seen.
I think he's right about the capital markets. I'm telling the companies that I'm involved in that they need to assume that they receive no more cash for the next 12 months. I don't know if it's true or not but it's a good mind set to have.

Movie recommendation: Slumdog Millionaire


Slumdog Millionaire, originally uploaded by a sack of seattle.

I had the pleasure of seeing this movie over the holiday weekend. I recommend the film without reservation. The movie was the best movie I've seen all year -- truly an exceptional film. I won't give away the plot or tell you anything other than it's great and go see it. I must admit the timing of the release of the movie and the recent terrorist events in Mumbai are ....well ....odd?! incredulous?!

And coming to a theatre near you....the commercial mortgage crisis

This was taken from an article I read yesterday. Read the entire article here. 

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won't write mortgages as long as investors won't purchase them.

"Credit markets have seized up," corporate securities lawyer Michael Gambro said. "People are not willing to take risks. They're not buying anything."

That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.

"The system has never been tested for a deep recession," said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.

One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.

Saving Citibank makes the market skyrocket, makes me look for cover

I think this Citibank deal is a really bad sign. 

Having to guarantee $300 billion of crap (i.e. bad loans) in order to save one big bank is just nuts.  That’s $1000 per American citizen.  And just a month or two ago, Citibank was one of the "strong" banks bidding on Wachovia.  So it makes me wonder, just how bad are things at the other "strong" banks?  I know George W. Bush says we can do more of these deals, but it makes me question how many of these deals we should be doing! 

You can read a related article on this topic here.

Let darwin solve the US auto industry crisis

I did like the idea I heard on CNBC last night.
The idea was a darwinian strategy for dealing with the auto industry debacle. Simple put, the 3 auto companies should be called together and told that the US government was going to give 25B to one of the 3 companies and the government was going to let the 2 other companies fail (or just not support them). The companies would have to go off and negotiate with unions, sub contractors and come up with the best plan to present to a panel of business execs. The winner of the contest would get 15B today and another 10 in 120 days if the company made progress on its plan.

Headline: Reality slaps entrepreneur in face

That's what's going on right now. Entrepreneurs everywhere are being slapped in the face by economic realities.   Lower sales, lower margins, lower valuations, fewer investors. That's the plight that I'm hearing as I have coffee after coffee with entrepreneurs. It's harsh but true.
I've had two companies that I'm an adviser to decide to shut down operations. Both companies are run by reputable, experienced entrepreneurs.  The entrepreneurs realized that their dreams of making millions in the sale of their company or in an IPO are not going to happen and they've decided -- with no alternate financing options to shut down oeprations. I think this is just the start of the 2009 cold winter bringing the deep freeze to many entrepreneurs' dreams. It may be reality, but it isn't fun.

Buy one Chrysler Avenger, Get one free

“Buy One, Get One Free” - That was the offer last week in the United Kingdom. But the two-for-one sale wasn’t for bags of potato chips or loaves of bread at the supermarket - it was for cars.

U.K. newspaper The Guardian reports car dealers across the country were doing the unthinkable to unload excess inventory. They were selling Dodge Avengers at 2-for-1. The gas-guzzling Avenger, made by Chrysler, has been one of the worst-selling cars in the country where gas will run you $5 a gallon (even with oil at $50 a barrel).

I read the above in a full article here over the weekend and thought it was worth re-posting. 

For what it's worth, I'm against the bailout or rescue (or whatever you call it) of the automotive industry. I have some understanding of how complex of a matter letting them fail is -- however, one can't get over the fact that the US auto companies fundamentally suffers from an inability to make cars customers like and will buy.  So, no matter how complex the failure of a GM or Chrysler -- the foundational problem is a company that fails its core mission -- its reason for being -- isn't worth saving.

I'd rather see the the monies that are being tossed around be -reinvested into the people that would be laid off.   Invest in a special re-training and re-employment programs. Give the employees a longer transition time because the economy isn't going to be able to re-absorb them quickly.  

Just my 2 cents from the sidelines.

The connection between economic and environment fuck ups

Forgive me for the expletives but I heard a presentation today about the state of the environment.  Wow. I don't know what to say other than we're fucked.

The interesting thing about the presentation is that the similarities between today's economic crisis / disaster and the upcoming environmental disaster.  The foundation of today's economic crisis were seen by some many years ago but we as a human race aren't able to do anything about it until imminent danger is upon us.  In the presentation, they talked about how we as humans don't act because climate change is:

  • invisible
  • with complex causality
  • caused by all of us (as opposed to someone else)
  • unpredictable and inderect impacts
  • unprecedented (no real history for it)

  • drawn out (as opposed to immediate

Doesn't most of that list look like it may also apply to the economic crisis about 2 years ago?

Economic reality is setting in on entrepreneurs

I've had a number conversations in the last week with early stage companies who are still holding onto too much hope with regard to the prospects for investment.  I hate to be the harbinger of bad news but getting investors -- whether that be venture capitalists or angel investors -- to part with cash this year is very unlikely. I don't want to say it's impossible, because we're looking at making a couple of investments this year. But, I'm still seeing too many entrepreneurs with expectations that are too high for the prospects of their company and the respective valuations, terms and likelihood of an investment. And, I'm still seeing investors holding onto their cash like a life raft.  Realistic expectations, perseverance, and innovation are the mind set that entrepreneurs must have toward managing their companies through this period.

Some thoughts post web 2.0 conference

I was at web 2.0 last Thursday and Friday and had a good time. I've been attending web 2.0 since 2004 when web 2.0 was born.  I remember because I was there right after George W Bush was re-elected.  The mood at that time was somber disbelief politically and a sense economic opportunity elation (if that's a phrase).  This past week was the opposite. Political relief, elation and awe over Obama and a real sense of economic sobriety. 
That said, it seemed like it was business as usual...just slower with less enthusiasm.  There's a real sense that hard times are upon us but hope springs eternal amongst the entrepreneurial crowd.  People are still looking at starting companies and getting funded... which is good.

Breathe a sigh of relief

Unfortunately, I haven't posted since Nov. 4, 2008 - the election of President elect Obama. The hard thing about writing now is that me emotions aren't quite as present as they were. That said, I recall that evening as the first time in recent American history that I was proud to be an American.  Regardless of your political background or affiliation, the election of Obama was a major milestone for America.  Obam's rise is one that we can all admire and feel proud of -- that we as a country have seen fit to elect our first black president only 60 some odd years after blacks had to ride at the back of the bus. 
Two of the weird things about the election night are :

  1. I don't think the election would have happened had it not been for the colossal disaster of the George W. Bush presidency and while George W. can't claim the election as a victory. He is to be thanked in part for Obama's victory.
  2. Proposition 8 looks like ti passed revoking the right of gay people to legally marry in California.  Ironic. I guess as a country we're more homophobic than racist.  Or more aptly put, better to be a black straight man than a white gay man -- you get the idea.  Makes you wonder when and if we'll ever have an openly gay president!?