Corporate Development 101: What Every Startup Should Know

This was orginally posted at OnStartups

What the heck is corporate development and why should I care?

Back in the first wave of the Internet, I was part of the team at BEA Systems that built up in-house corporate development.  Our charter was simple: add significant market cap value through acquisitions, investments, and partnerships.   Specifically our stated mission: “To support BEA becoming the industry standard ebusiness application platform by leading the process with senior management in developing and managing corporate-wide strategy, acquisitions, equity investments, and selected strategic relationships”

For entrepreneurs, I think its helpful to understand the role corporate development plays in larger software companies.  Could be for potential partnerships — maybe an acquisition.  Or, maybe you’re growing fast enough yourself to warrant acquiring other companies.  Regardless, it helps to have a basic understanding of what the corporate development teamdoes.

What is corporate development?

- most public consumer and enterprise software companies (and increasingly many high growth private companies) have a person or sometimes a team in charge of corporate development
- the mandate varies from pure deal execution to a role that combines strategy, execution, and integration.  Sometimes the charter includes strategic partnerships and minority investing
- for example, at BEA Systems, we adopted the former model.  Each of us were embedded deep in a business unit, working closely with the product, engineering, sales, finance and marketing teams on overall strategy and how strategic alliances, investments or acquisitions could add significant value.  Our team had a solid mix of backgrounds including investment banking, VC, engineering, and operations.  So we covered strategy, deal sourcing/execution (partnership, investment or M&A), integration, and post deal measurement

Is there any point in talking with corporate development unless I am thinking about an investment or acquisition?

- I lean towards the view that it can be very helpful.  It’s often hard to navigate Byzantium organization structures from the outside and the corporate development executive can help facilitate who you should be talking to for partnerships/customer relationships.  They can also be incredibly helpful in simply understanding the product and business priorities of divisions
- And most M&A deals typically don’t just magically happen.  Rather, they are often the culmination of bus development/partnership/vendor-customer relationships where fit is tested first, the product is kicked around and deals are somewhat more de-risked.  Developing relationships with corporate development early can prove very helpful later down the line when you might be thinking about investment or acquisition

How would my company be perceived from an acquisition viewpoint?

- the reason for doing an acquisition varies and it’s important to understand where your startup fits.  Some reasons deals are done in the software space include:
- acquire talent (look at what Yahoo! has done in the mobile space)
- acquire important pieces of technology (vs build or partner. Quite often time to market pressure pushes companies to buy rather than build)
- extend the product suite (eg Oracle’s recent acquisition of BlueKai filled an important gap in their Market Cloud suite)
- acquire new capabilities (eg the acquisition of many cloud/SaaS/mobile companies by larger software companies as they move from on-premise/perpetual license business models)
- extend the software platform/portfolio into related/new markets  (eg VMWare’s $1.5Bn acquisition of AirWatch is a big bet on the enterprise mobility space)
- I’ve also seen deals that are “change agent” deals, designed to help senior management change the nature and culture of an organization by bringing in new senior executives to be a catalyst for change
- Understanding the “why” from a potential acquirers perspective is key

Types of acquisitions
- very simplistically, software acquisitions tend fall into two broad categories – smaller, tuck-in acquisitions or larger more strategic deals.  Some common characteristics of tuck-in acquisitions:

- small value relative to the market value of the acquirer
- the analysis is often build/partner/or buy
- cash & or stock deals with 1 to 4 year retention packages
- often done in-house (no investment bankers, but sometimes external counsel and accounting diligence)
- simpler integration (but that doesn’t mean it can’t be messed up)

- at the other spectrum are larger strategic acquisitions that will have a significant impact on the acquirer.  Significant could be measured as % of market cap the acquirer is paying, impact on operating margins, earnings per share, etc.
- the much reported on Facebook acquisition of WhatsApp is an example of a significant strategic acquisition, with Facebook spending 10% of its market cap.  These deals often involve investment bankers (Allen & Co advised Facebook while Morgan Stanley, one FB’s underwriters, advised WhatsApp), and investor calls to explain the strategic rationale of the deal
- prices paid in these deals often reflect the total addressable market opportunity

What’s the typical investment/M&A process?

- at any point in time, corporate development has a pipeline of opportunities which they are tracking.  Some of this is inbound, some outbound (as I was writing this, I looked at one of my old BEA pipelines which had close to 50 opportunities listed, categorized between very high priority, high priority, low/medium priority, no interest)
-  while corporate development plays a key role, finding a sponsor is critical, which could be the CEO, business unit president, head of product/engineering, etc.  This person is the one raising their hand to champion the deal – and being held accountable for the results. How hard or easy this is within each technology company varies greatly.  Knowing insiders can be very helpful (talk to other entrepreneurs who were acquired to give you a sense of process and key players)
- how long it takes to close a deal varies.  Sometimes it’s a relatively quick process, other times it takes months, often driven by the complexity of the diligence and integration process, and the competitive dynamics

Can your VCs help?

- yes, by making the appropriate introductions to companies of interest, either at the corporate development or operations level
- an interesting, early trend, is the institutionalizing of a corporate development team within venture firms, to assist portfolio companies with their sell and buy side strategies.  I think this is a smart move and has potential to add significant value to portfolio companies and help drive a VC firms returns and overall track record.  See Andreessen Horwitz team here.  Their pitch: “helping companies plan their strategic and financial future.  It’s all about anticipating needs, and architecting the right way forward for your company”.

Posted in Corp dev, Startups | Leave a comment

How Much Should A Startup Founder/CEO Pay Herself?

This post originally appeared on Dharmesh Shah’s wonderful blog – OnStartups

Back in 2008, Peter Thiel did an interview at TechCrunch50 in which he said one of the most important things he looks at before investing is how much the CEO is getting paid.

The lower the CEO salary, the more likely it is to succeed.

The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It [a low salary] aligns interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.

In practice we have found that if you only ask one question, ask that.

What’s the average salary for CEOs from funded startups? Thiel was hesitant to answer, but eventually said $100-125k.

An interesting perspective. I’m not sure that it’s a leading predictor of success, but it certainly is a very important aspect at the seed stage because cash is so precious. The more a CEO pays herself, the less runway available to hit milestones.

CEO founders sometimes ask me for guidance on what is “market” for salaries in a seed stage startup. Some observations:

  1. Stating the obvious, salary needs can vary widely. A founder with no mortgage, kids, etc will have different cash needs than a founder that has a minimum cash hurdle to clear (in the absence of being very wealthy)
  2. The amount raised in a seed round has an obvious impact. I know a couple of cases where if bigger seed rounds had been raised, the founders would probably have bumped up their salaries a little
  3. The percent equity owned by the CEO post the seed financing varies as a function of not just the size and terms of the seed round, but quite significantly, by the number of founders and how equity is divided up between them. While not a direct driver of cash salary, the amount of equity owned can have a psychological impact on salary expectations.
  4. Another influencing factor is how long the company has bootstrapped prior to the seed round and how much were the founders getting paid during this time. I know of a couple of companies I am invested in where the founders didn’t pay themselves anything for quite a while as they were building the foundations of their product
  5. If the company raises a Series A round, its typically to see seed stage salaries adjusted upward.
  6. As companies mature, its typical that a compensation committee is formed by non-management board members. In fact, the VCs will insist on this. The role of the compensation committee can vary, from making recommendations to the board on executive salaries, bonuses (and option grants) to having authority to set executive salaries

Based on what I see in the market, I’d say the range for founder CEO salaries after a seed round is between $60k and $150k, with the average/median in the range of $90k – $110k. This is based on an average seed round of around $900k with the expectation that the round will provide runway for 12 to 18 months. Salaries at the upper end of the range ($150k) are correlated with larger seed rounds of around $1.5 million.

While there is no correct answer to the question, here is my main take-away: it’s so critical to be capital-conscious at the seed stage. Within what will feel like an incredibly short, stressful period of time, the startup needs to build product, figure out the market, and get some initial traction. Every month of cash burn is valuable.

By the way, to see some survey data on what other people think the founder/CEO salary should be, check out the OnStartups poll on founder salary.

Posted in Business, Investments, Startups | Leave a comment

Don’t Make Raising Angel Funding Your Plan B

This post originally appeared on Dharmesh Shah’s wonderful blog – OnStartups

I wear two hats one as a general partner of a couple of seed stage VC funds, the other as an occasional angel investor. Wearing my angel-investing hat, I wanted to highlight an issue that I encourage founders to be careful about when pitching. There are variations on the theme, but essentially it’s a line that goes something like:

“…we’ve talked to some VCs who are really interested, but they tell us we are too early for them to finance our round. So we are raising a small seed round now to hit the milestones they want and then will raise our A round. Its often followed by, we just need $[insert here, but typically $100k - $500k] for [6] months to hit our milestones…”

So what’s the problem with this pitch to an experienced angel investor? When I hear this, I’m thinking:

1. The way you have pitched it to me says you struck out with VCs so now are turning to angels as a backup strategy.

2. From your voice, tone, body language, it feels like you really want the VC money and angels are just a stepping-stone to get the VC round.

3. You are probably new to the process of raising money from VCs. You miss reading the buying signals, and are possibly confusing interest with a genuine desire to finance your startup. It’s the job of a VC not to miss out on a potentially good deal, so the process can be full of we’re interested signals rather than an outright no.

4. The likelihood of raising money from any of the VCs you are talking to is probably very low. Not impossible, just unlikely.

5. So not only is there high seed stage risk (product, market, team), there is very high financing risk on the deal. It’s unlikely you will hit the milestones in the time frame you’re thinking and the most likely outcome is that you need to approach your angel investors around the table for more money, which will set up a potentially challenging discussion and negotiation.

6. Even if the scenario plays out that short money leads to solid metrics, which then leads to a VC funding the next round, the way this has been pitched, it doesn’t feel like there is the basis for a strong partnership.

Ok, so what can you do? Its perfectly fine to test your concept with VCs with large funds to get a range of feedback on various elements of the business like “is it fundable?”, “where are the key risks?” “what other analogs have they seen?” And if you’re not getting them to bite on the seed round now, recalibrate your funding strategy for angel investors. But when you do that I’d suggest:

1. Pitch to angels as partners not just a means to get the VC round. This will comes across in your slides, voice, body language and how you frame your overall financing and de-risking strategy.

2. Consider if there a better financing approach. Is it possible to operate on a small amount of money for say 12 18 months, which will give you enough time to experiment, learn, adjust, and de-risk the opportunity? This seems like a more attractive proposition to an angel investor and if it works out, there is a good probability that a larger VC raise will be done at a decent up round valuation.

3. If angel financing is not available for 12–18 months, is it possible to work with the angel investors to do a small seed with agreed testing/learning/milestones that will lead to them funding another round?

Approaching experienced angel investors in this way will hopefully result in them leaning forward instead of backward, and being much more enthusiastic about finding a way to work together. What do you think? Any lessons learend from navigating the angel and VC funding?

Posted in Angel investing, Investments, Startups | Leave a comment

Boston Mobile Madness

At Xconomy’s very successful Mobile Madness event a couple of weeks ago, I was struck by the vibrant mobile startup scene in Boston.   Its not that mobile focused startups are new to Boston, but rather that the ecosystem “feels” vibrant at the moment.  While the well-documented macro trend of the post-pc or “always connected” era is contributing to this, the bench strength of mobile entrepreneurs in the area is another driving factor (thanks to successful startups such as m-Cube/Verisign, enpocket/Nokia, TSM/AOL, Cardstar/Constant Contact, Where/Pay Pal, Quattro/Apple, Starent/Cisco).

While mobile innovation is occurring across the typical web categories of e-commerce, gaming and display/search advertising, the unique capabilities of phones/tablets are also enabling innovation across new areas such as payments, in-store shopping, personal healthcare, social collaboration, and marketing.  In addition, software solutions are being developed across the mobile technology stack (eg, app management, crash reporting, analytics, app development, middleware, security etc).

To get a snapshot of the Boston startup ecosystem, I segmented angel/venture funded mobile startups into five areas – applications, marketing, commerce/payments, enterprise & infrastructure software/tools, and mobile operator technology.  As in any segmentation exercise the boundaries are fluid with several of the companies crossing segments.  For each company, I noted the CEO/founder, major venture backers and approximate amount raised to-date.

CommonAngels Fund is invested in four local mobile startups (in italics) – Apperian, Skyhook Wireless, Kibits, and Crashlytics.

Please let me know if I am missing anyone! (Updated April 15 – Crashlytics A round; Wikets; AisleBuyer sale to Intuit; MassChallenge alumni, Dexrex)

Applications

RunKeeper (FitnessKeeper) mobile fitness platform.  Jason Jacobs.  (Spark, OTV, Launch Capital, Revolution, Boston Seed – $12M)
MocoSpace  mobile game community.  Jamie Hall, Justin Siegel.  (General Catalyst, Softbank – $11M)
Illume Software  iZUP app for preventing drivers from getting distracted with cell phones.  Daniel Ross (MTDC, angels – $6M)
SpringPad  app for taking and saving notes.  Jeff Janer, Jeff Chow, Jason Horman.  (Fairhaven – $4M)
Ginger.io   models user behavior from cell phone usage to make inferences about health and wellness.  Anmol Maden.  (True Ventures, Launch Capital, Eniac, Kapor – $1.7M)
Wikets   app for recommending places and products to friends.  Andy Park, Vijay Manwani, Ravi Reddy.  (Battery Ventures, Andreessen-Horwitz – $1.5M)
Kibits  real time group collaboration.  Matt Cutler, Dave Greenstein.  (CRV, Commonwealth, GC, Google, CommonAngels Fund, Launch Capital – $1M)
LuckyLabs  casual games for mobile devices.  Steve Kane. (Atlas – $1M)
BrassMonkey  app that turns your phone into a controller.  Chris Allen, Jim Bull.  (Boston Seed, angels. MassChallenge – $750k)
LoseIt (FitNow) app for keeping track of diet and exercise.  Charles Teague, JJ Allaire. (General Catalyst – $n/a)
HeyWire  (MediaFriends/Integra5)  text, photo sharing, twitter/FB chat app.  Meredith Flynn-Ripley. (n/a)
Tap Lab  location based games.  Dave Bisceglia, Ralph Shao (TechStars, angels, MassChallenge – $550k)

Emerging startups:

EyeNetra   eye diagnostic tool for mobile phones.  David Schafran, Vitor Pamplona.
GymPact  app for incentivizing exercise.  Yifan Zhang, Geoff Oberhofer.  (TechStars)
Jaxx   app that allows guys to create private social groups.  Phil Mark, Ben Sobczak, Frank Horton.
Drync  app for finding, managing, and buying wine,  Brad Rosen.  (Mass Challenge)
ByteLight  enabling technology – uses LED lights to pinpoint indoor location for apps.  Aaron Ganick.

Marketing

Jumptap    mobile ad network.  George Bell, Jorey Ramer (General Catalyst, Redpoint, Summerhill, Valhalla – $94M)
Jana (Txteagle) platform for marketers to target emerging market consumers.  Nathan Eagle.  (Spark, RBC, Qualcomm – $10M)
SessionM  game mechanics to improve app user engagement & loyalty.  Lars Albright (Highland, KPCB iFund – $7M)
Zmags  digital publishing for brands on mobile & tablet devices (also web). Michael Schreck. (OpenView, Northbank – $7M)
Fiksu  mobile app user acquisition solution.  Micah Adler. (CRV – $6M)
Celtra self serve mobile ad creation platform.  Mihael Mikak.  (Fairhaven, Grandbanks – $5M)
NexAge  real time bidding platform for mobile impressions.  Ernie Cormier, Devkumar Gandhi (Grandbanks, Blackberry – $5M)
Adelphic Mobile  targeting platform for publishers and advertisers to run more effective mobile campaigns.  Jennifer Lum, Changfeng Wang.  (Matrix – $2M)
Media Armor  tools to measure mobile display campaign effectiveness.  Eric Brown, Elizabeth Zalman  (Greycroft, iNova – $1.5M)
Survey on the Spot mobile surveys for customer & employee insight.  Geoff Palmer, Ken Kimmel (Kepha, Angel Street – $750k)
Locately collects opt-in GPS information to better understand consumer behavior.  Thaddeus Fulford-Jones, Drew Volpe, Eric Weiss.  (angels, MassChallenge – $300k)
Appswell  crowdsourcing platform for brands.  Dan Sullivan.  (TechStars)

Commerce/Payments

SCVNGR  location based games platform.  LevelUp mobile payments platform.  Seth Priebatsch.  (Google Ventures, Highland – $20M)
Paydiant  smartphone based mobile payments solution.  Kevin Laracey, Chris Gardner, Joe Paratore. (Northbridge, General Catalyst – $8M)
AisleBuyer  in store shopping & payments app .  Andrew Paradise.  (Old Willow Partners, Richard Heise, Jr. – $8M.  Acquired by Intuit, April 2012)

Enterprise & infrastructure software/tools

Apperian  enterprise software for mobile application management.  David Patrick, Chuck Goldman.  (Northbridge, CommonAngels Fund, Bessemer, KPCB iFund, Launch Capital – $24M)
Verivo (Pyxis Mobile)  enterprise app development. Steven Levy, Todd Christy. (Commonwealth, Ascent, Egan – $24M)
Vivox   voice platform for publishers.  Rob Seaver, Jeff Pulver (Grandbanks, Canaan, Benchmark, IDG Ventures, Peacock – $23M)
Skyhook Wireless  location positioning software.  Ted Morgan, Mike Shean.  (RRE, Bain Ventures, CommonAngels Fund – $17M)
Crashlytics   provides crash reporting solution for developers.  Jeff Seibert, Wayne Chang.  (Flybridge, Baseline, CommonAngels Fund - $6M)
Viximo  social, messaging, and engagement library for mobile app developers. Dale Strang, Sean Lindsey.  (Northbridge, Sigma – $5M)
Mobiquity   Mobile IT professional services.  Bill Seibel.  (Longworth, Sigma – $5M)
Modo Labs   solutions/services for universities & enterprises using the Kurogo Open Source mobile platform.  Andrew Yu. (Storm Ventures, New Magellan – $4M)
Localytics  provides app & audience analytics for developers and marketers.  Raj Aggarwal (TechStars, angels, MassChallenge – $3M)
Dexrex   mobile message archiving.  Joe Deliso, Derek Lyman, Richard Tortora (angels – $2.8M)
Kinvey  provides cloud based services to developers.  Sravish Sridhar  (TechStars, Atlas, Avalon, Boston Seed – $2M)
ViziApps (MobiFlex)  app development tool.  George Adams, Michael Kuperstein. (Kofax – $500k)

Mobile operator technology

Movik Networks (Lyra Networks)  platform to improve radio network utilization for mobile operators. John St. Amand, Ramji Raghavan. (Northbridge, Highland, Oak – $41M)
MobileAware  provides mobile commerce and self care functionality to operators. Armin Gebauer.  (Nauta Capital, Cross Atlantic – est $11M)

Posted in Boston, Investments, Mobile, Portfolio, Startups | Leave a comment

The 7 Business Slides for Startups

You’re an early stage entrepreneur building a Web-based subscription business. You have your board meeting coming up soon, or you’re sitting down with your close advisors.  What information should you provide?  How should you focus the discussion?

I’d suggest 7 business slides to help frame the conversation.  But I’d also suggest, ahead of any board/advisory meeting:

• Agree on a way of reporting your business metrics and get everyone comfortable with these definitions

• Talk or meet with your board members before the board meeting so that during the meeting the metrics, hiring, and other news is not actually news to board members. Instead spend most of your time on one or two strategic issues that you choose for each meeting. For example, “Hiring,” “Building a Sales Machine,” “Company Positioning,” “Strategic Challenges,” etc.

The 7 slides:

1. The funnel/sales/customers.  Measuring each stage of the funnel (traffic → trial → conversion) is obvious. The key discussion points are what parts of the funnel are underperforming, why, and what you are going to do about it.  Is it an issue around your target audience, messaging, product features, product performance, pricing, competition, or your sales team?  Or perhaps it’s a challenge around building a new category, where it’s taking time to build awareness.

There are many Web-based subscription businesses targeting many different customer markets (consumer, very small business, SMB, specific verticals, etc.). For each market, you should be able to collect some data on what on what funnel metric ranges you should be targeting (for example, a solid traffic/sign-up ratio might be in the 8-12% range).

2. Sales/marketing. Building off the funnel discussion are a range of sales related issues.  What are you learning about your sales model?  How will you generate leads (inbound, outbound) and what sort of coverage are you looking for?  When do you hire your first sales rep?  What profile should you look at (just out of school; some business experience; some sales experience; domain knowledge; technically proficient)?  How do you structure the compensation plan, particularly if you are in the early days of building the pipeline?  How do you think about the time to ramp and therefore impact on cash?  Have you sufficiently defined the target markets?

3. Product. This tends to be a significant discussion topic at the seed/early stages and covers a wide range of sub topics – features, use cases, personas, development timelines/resources, scaling, user experience, design, API strategy, “whole product” strategy, etc.

And of course, it can’t be separated from the funnel and sales discussion. Assuming you have some early customers, the discussion typically revolves around key learnings for the business – feedback from customers around the product, onboarding process, post-sales process.  Where do customers perceive the real value in the product? Do you need to adjust your pricing model? Increase or decrease feature set?  Should you start to think about different price/value bundles?

4. Business development.  In technology markets, value is rarely created in isolation.  All tech markets have ecosystems that your startup needs to understand and navigate.   When and how should you engage in business partnerships?  How do you prioritize these given limited resources? Partnerships take time and resources, so the discussion typically involves prioritizing which companies to approach, where warm introductions are needed, and how progress should be measured.

5. Team.  For tech companies most of the expense – burn – is headcount related. Adding more headcount will add to the burn and the “cash out” date is brought forward. The discussion on the team is multifaceted based on what you are learning about the business. Where are the priorities? Who are the critical short term hires? How do you find them? Should you hire a search firm?   On the other hand, maybe you need to look at extending the cash runway because expenses have gotten too far ahead of sales growth.  Where/how do you and the investors deal with this?

6. Financials/funding.  There is the obvious comparison of financials/key metrics to the plan and related discussion.  Most importantly, what are you starting to learn about the economic engine of the business: the cost to acquire customers from different channels, cost to on board & service customers, retention rates, gross margins, etc.

A lot of focus is also put on the “cash out” date. Do you need to adjust this?  What are you trying to prove with this financing that will enable you to raise the next financing, from either current or new investors?  Are you hitting the milestones that you agreed with your investors?  Is the “investment story” starting to come together?  Of course, if you can get to cash-flow break-even, then that gives you more options.

7. Market developments.  This is one slide that I don’t actually see startups including as much as I would like.  This is the “big picture” slide that covers significant events happening in the broader market.  Such events could range from competitors’ significant product releases to acquisitions, financings, new competitors, pivots, and the like.  Overall, how do you think the market is developing?  In light of these developments, are you making the right strategic choices?

The goal of my pointers is not to make you build a ton of slides, but to engage smart people around the table to get input/help on a range of strategic and tactical issues for the business.  As mentioned in the beginning, the more prepared board or advisory members are about the state of the business, the more a board meeting can focus on one or two strategic issues.

Posted in Business, Internet, SaaS | Leave a comment

Elite tech startup schools

PBS Newshour correspondent Hari Sreenivasan recently did a segment on startup accelerators featuring TechStars (disclosure: im a mentor in the Boston program), Y Combinator, AngelPad, and Blackbox Ventures.

My friend Wade Roush, chief correspondent at Xconomy, is also featured in the clip. His write up is here.

Posted in Angel investing, Boston, NYC, Startups, Tech Stars | Leave a comment

Clovr Media now Linkable Networks

Yesterday Clovr made two big announcements.  First, the company announced a change of name to Linkable Networks and second, a strategic investment from Citi Ventures.  We are thrilled to welcome Citi to the investor group alongside terrific investors, Kepha Partners and Bain Capital Ventures.

Some press coverage:

·         Boston Business Journal: “Card-linked startup Clovr Media announces name change, investment from Citi

·         Xconomy: “Clovr Changes Name to Linkable Networks, Nabs Investment from Citi Ventures to Push Card-Linked Offers

·         BostInnovation: “Clovr Media Gets A Strategic Investment from Citi & Changes its Name

·         AllThingsD: “Clovr Renamed Linkable Networks, Raises Capital From Citi”

 

Posted in Boston, Digital media, Portfolio | Leave a comment

Putting Together Your Perfect Seed Round

The seed market for tech startups — particularly digital media, social, local, and mobile — is very active. Many companies are getting started and lots of investors are making seed investments.

Because of my involvement in the Boston and NYC ecosystem as a managing partner at CommonAngels, I’ve been asked by several entrepreneurs a very simple but loaded question: “How should I think about pulling together my seed round?”

To answer that here, it’s important to remember that every situation is unique.  As I look at close to a dozen seed investments we have made in our fund, the composition varies. From angels only to micro VC with angels to multiple VCs and all the blends in between. Below are some of the things I think you need to consider if you’re raising:

  • What do you really need?  If you’re looking for business model advice, access to beta customers, access to the broader ecosystem, or help with recruiting, ask yourself: who can help you the most (and the follow on question, who will actually do so)
  • Have a clear sense of your milestones and an operating plan that makes sense to achieve them.  Spend time with your lead(s) investor agreeing on this up front.
  • Have a lead investor.  Someone who will take a leadership role in the deal.  This is the person you directly negotiate with and who the other investors – VCs, micro cap funds, angels, angel groups – look to as the lead investor
  • Don’t leave this to the last minute.  Start to spend time with potential investors early.  What is the chemistry like?  Do they make introductions for you?
  • Ask your fellow entrepreneurs.  In both Boston and NYC, it’s a small ecosystem in early stage IT.  Do your homework.
  • Signaling risk is real.  I know Mark Suster says everything is a signal – and I agree – but not all signals are equal. Understand the risk and the tradeoffs.
  • Understand the risk/reward of a pre-negotiated deal (more on that later). On the one hand it may make a ton of sense; clear understanding of the milestones; you will get the time/attention of the VC firm; and you don’t need to worry about fund raising for the Series A (assuming you hit the milestones).  On the other hand, you are taking the ability to maximize the price and terms of the Series A round off the table.

Based on my experience of running a micro cap VC fund, there are several nuances in seed scenarios I can share that might be helpful to you.

Multiple VCs
This is where several (more than 2) VC firms invest in the seed round.
Pros:  you get access to a broader range of contacts and advice.
Cons:  you probably won’t get the full time attention of the general partner
Series A dynamics:  this is the most interesting question in these type of deals.   By having several firms in the deal, if one doesn’t want to participate in the A round, then hopefully you have others to support you.  On the other hand, if everyone wants to invest on the A round, how is each firm going to get their ownership position they want?  (Most larger VC funds have target ownership ranges in a Series A – anywhere from 15% – 25%+). The math gets problematic.

Individual general partners
A VC firm may pass on a deal or the entrepreneurs may not want to take institutional money just yet (typically from a sizeable VC fund). However, the general partner really likes the entrepreneurs and deal, and wants to invest personally.  The policy on doing this varies by firm – some firms don’t allow this; others do so long as its not a deal for the partnership.  Often if the firm invests later, the GP’s investment is rolled into the firm’s investment
Pros:  theoretically you can get access when needed to the partners knowledge and contacts…..without dealing with a big firm partnership.  The signaling risk on the next round is lower than if the firm invested
Cons:  your not really going to get that much attention and help unless it’s a deal that the partner really wants to line up for the next round.  Just like any other angel investor, will they follow on if there is an insider led round before the A round?
Series A dynamics: the signaling risk is low and you will have the opportunity to pitch your A round to other firms

West coast/east coast
This is where you look to have high quality investors in your seed round from both coasts, often looking for a mix between Boston, California, and NYC. This is an important consideration where the ecosystem that you are in spans these cities.  For example, if you are a media startup in Boston having investors in NYC that can plug you into the media and advertising agency ecosystems in NYC can be incredibly valuable.  Most tech companies I’m invested in will at some stage look to California for customers and partnerships.  Well connected Californian seed stage investors can help you open up doors.

Pre negotiated rounds
This is where a VC firm (typically 2) will fund your seed round but its “stapled” to the back of a pre negotiated Series A round. For example, “we will invest $500K in the seed round, and assuming these milestones are hit, we will led a $5M A round on these terms”
Pro:  Because you have locked in you’re a round, you don’t need to spend months on the road trying to raise it
Cons: could you have gotten a better A round deal in the open market?

What does this all mean?  If you are in the fortunate position of having investor interest in your seed round, you need to think about the composition of the round very carefully.

Posted in Boston, NYC, Startups | 4 Comments

From Nashville to Boston: How A Startup Accelerator Changed Our Lives

Nick Francis, CEO Help Scout, did a terrific write up on the team’s experience in the Boston Tech Star program.  If you are thinking about the Tech Stars program, its a must read. (full post here)

Posted in Angel investing, Boston, Startups, Tech Stars | 1 Comment

Clovr at Finnovate

Good overview by Tom and Doug explaining the Clovr platform at Finnovate:

Posted in Boston, Digital media, Investments, Portfolio, Startups | Leave a comment