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Dividends and Preferences

Musings on Venture Capital, Technology and Entrepreneurship -- from a California Transplant in the Old South.

Last Build Date: Fri, 03 Oct 2014 07:44:33 +0000


Out and About

Tue, 26 Apr 2011 02:19:00 +0000

Hey folks -- I'm getting ready to head down to the RTP area for the annual CED Venture Conference.  This year it is in downtown Raleigh, instead of Pinehurst, and looks to be bigger and better than ever.

So, if anyone happens to be in the area on Wednesday or Thursday, send an email or skype me and we can definitely meet up for coffee and/or beer.

One other thing, Zack Mansfield, a good friend with Square Roots has a new blog that is off to a great start.  It looks like he is going to be doing some pretty interesting video interviews with entrepreneurs in the South East.  You should check it out and consider signing up.  Here's the link again.  Also, if you are an early stage start up, talk to Zack.  He knows everyone and the Square Roots program is the best price possible -- free.(image)

Securities Law FAIL

Tue, 19 Apr 2011 18:01:00 +0000

Longtime viewers of this blog will recall that one of my favorite memes is -- "Try Not to Violate Securities Laws."  It never ceases to amaze me how easily and often folks violate securities laws.  It is a war of information, people, and we need to spread the truth.

Here is a sign that my good friend, Fred Bryant (@WealthForgeFred), found on Church Hill in Richmond, VA a little while ago:

Now, while I'm sure that the fine gentleman (gentlewoman?) that posted this advert is an exceptional snow blower, the problem is that this is what we lawyers call a "general solicitation."  And that is a no-no.

Once you have made a general solicitation, you have disqualified yourself from most "private placement" exemptions under state and federal securities laws.  And, without an exemption, pretty much the only way you can do an offering is through a registered IPO.  Moreover, get this, since you made a general solicitation before you had your IPO registration statement on file with the SEC, it will at least delay, if not put an end to, your IPO.

While there has been some recent speculation that the SEC may ease up on the general solicitation prohibition, this is a long way off and the prohibition still stands.  So, please people, Try Not to Violate Securities Laws.(image)

Someone Wrote a Book About Me!

Mon, 18 Apr 2011 14:40:00 +0000

(Well, maybe not a whole book, but at least a short chapter...)Hey folks!  I know it has been a little while since I've posted anything.  I typically take a break over the winter holidays, but have really let it go for too long.  However, the good news is that I have built up a great big list of post ideas and topics that I'll be working on over the next few weeks.  So there should be a lot more to come...In the meantime, I wanted to give you a quick heads up about a pretty cool thing.  You may have heard of Gary Vaynerchuk -- author of the New York Times bestseller "Crush It," wine expert and social media master.He has a new book out called "The Thank You Economy."  Very loosely, it is about how, in today's world, businesses may actually be better off by leaving a little on the table, as opposed to extracting every last nickel.  The main thrust is that in our new normal, always-networked, social-graph driven world, things like a good business reputation, honesty and fair dealing will outlast a given transaction and live with you, potentially forever.  It is actually in your best business/financial interest to deal with people fairly or even favorably, as your reputation will live on in your social graph.The book is a great read and I highly recommend you pick it up (here it is on amazon).  But what is perhaps the coolest thing for me is that Chapter 13 is called -- "Hank Heyming: A Brief Example of Well-Executed Culture and Intent."  For the newcomers, that's me, Hank Heyming. I hardly know Gary Vee -- I only met him in person once, at his "secret wine party" during SXSW 2010 (at the Speakeasy) -- and I doubt he remembers me.  However, through some random chance and some intersections in our mutual social media networks, I got to be a part of his latest book.The chapter focuses on some of the things I have been doing to help nurture the entrepreneurial ecosystem here in the South East.  It also touches on my belief that the last thing a startup needs to be doing is paying a lawyer for basic legal needs. Here is a link to a SlideShare of the chapter (it is a photocopy so you will need to expand the viewer).  The chapter is only a few pages long and is a quick read -- you should definitely check it out and then go out and buy the whole book.  (For the record, I am only including the photocopy temporarily -- the publisher has promised to make my chapter the one available for free on the book's website, and when they do, I will redirect.)Anyway, thanks for putting up with a little self promotion.  I'm actually planning to do a longer blog post later this week that will go into more detail on my thoughts on startups and legal fees. [...]

What's Next According to VCs?

Fri, 22 Oct 2010 13:46:00 +0000

On Monday at the Digital East conference, the obligatory VC panel answered the obligatory question on what the new, new thing is going to be.  These sorts of panel questions usually lead to the same answers -- cloud services, social media, programmable web, hey I hear cleantech is going to be big.But for some reason, this panel gave what I thought were some particularly insightful insights. E-Commerce is ready to start attacking hard businesses.  John Backus of New Atlantic Ventures started off the discussion with one of my very favorite themes.  Selling books and cds on the web was very web 1.0.  Selling shoes and clothes on the web was very web 2.0.  It's time to figure out how to sell the tricky things -- the unique items, the vintage items, the mass customized items, the collectors items.  In particular, John called out fine wines as an area that he thought the web was ready to solve.  I can think of a half dozen other areas.It's time to take another look at digital media.  John Backus also hit one of my other favorite themes right on the head by noting that digital media is just beginning to take flight on the internet.  The ad spend in digital media is finally gaining momentum and the predictions and trends are all beginning to come true.  My sweet spot in this area is digital music -- as I've told anyone that will listen, digital music is still fighting World War I.  It's time to get out of the trenches and embrace some of the new technological developments to harvest the money that is becoming available.  The new internet is perfectly situated to provide the "last mile" of bricks and mortar commerce.  Don Rainey of Grotech Ventures discussed this hyper local meets internet 2.0 trend, my third favorite theme.  Using an analogy to the last mile of phone and internet services to your home, Don noted the many tools that the internet was developing for small and mid-sized business to reach out to and acquire customers in efficient and inexpensive ways.  He also noted how the internet can help these small businesses with time sinks such as appointment setting.Some great and unexpected thinking.    [...]

Identity through Design

Wed, 20 Oct 2010 13:06:00 +0000

(Originally posted on youNEQ on 7/25/10)This weekend, I watched "Helvetica" again.  If you haven't seen it before, it's a wonderful documentary about the history of the Helvetica font.  What makes it such a good re-watch is that, as it explores the history of Helvetica, it also manages to explore the entire history of post-war graphic design.  And during this exploration you encounter many of the great graphic design luminaries of the past 70 years.What struck me this time in particular was the the notion that we express our identity through our design choices.The last statement of the movie is by Rick Poynor, a noted thinker on cultural criticism and design theory. His final thought is roughly the following:To care about [design] in the way that you care about the clothing you are wearing, as an expression of who you are, or your haircut ... or how you decorate your apartment ...  We accept the idea of identity being expressed in that way, through these consumer choices, well now it’s happening in the sphere of visual communication and there’s no reason -- as the tools become ever more sophisticated -- why this just won’t go on developing and developing and developing.I think that Mr. Poynor is exactly right and I also believe that there is no reason that this line of analysis is limited to graphic design.  People want everything in their life to speak to them and their personal identity -- including their belongings.  Belongings can also work as an expression of self and identity.  People should not simply be limited to making "consumer choices" when they choose how to express their identity.   This is one of the cornerstones of the youNEQ project.  We look forward to exploring it with you.  -- Hank [...]

Find the Truth...

Tue, 19 Oct 2010 04:01:00 +0000

Today, at the Digital East conference in Tysons Corner, Don Rainey of Grotech Ventures made a sage observation -- he said:
When we look at a startup.  We look for a commitment to test, to trial and error, to finding the truth.  That's what we are looking for.
To me this speaks to a fundamental philosophy of startups.  Are you coming at your idea with a commitment to discovery?  Or are you coming at it with a commitment to entitlement?

In today's startup environment there is a significant amount of lip service paid to "lean startup" methodologies and etc.  However, checking into the self professed lean startup movement is only meaningful if you can adopt the three principles Don hits --  Are you committed to testing?  To trial and error?  And most importantly, are you committed to finding the truth?  Because, believe me, the truth is out there.  There is a business model that will work for your idea.  The trick is discovering it and the path is through iteration and experimentation.(image)

Some Housekeeping

Mon, 18 Oct 2010 02:18:00 +0000

Hey folks,

Just a quick housekeeping post.  First, I wanted to give you a heads up on some great events coming up that I will be attending -- if you will be at any of these, shoot me a text or email and we can meet up.

The first is Digital East happening tomorrow, October 18th, in Tysons Corner.  My good friends at Network Solutions are one of the many sponsors.  The conference is sold out, so I've got high hopes for it.

Next is The Venture Forum's Top 25 of the Last 25 event on October 27 at Center Stage in Richmond, VA.  This event is going to highlight the top 25 central Virginia entrepreneurs from the last 25 years.   Should be a great event and a good opportunity to check out the new Center Stage complex.

Then, on November 17 and 18, I'll be at the Internet Summit 2010 in Raleigh.  This is co-hosted by my great friends at Southern Capitol Ventures (the hardest working VCs I know).  I went last year and it was a fantastic event.  Should be even better this year.

Last, don't forget SXSW.  It is still a few months away, but I'm already pretty excited for it.  I may have two companies ready to demo there and I've got my fingers crossed about doing a panel presentation.  See you there.

On the blogging front, I know I've been relatively quiet on this blog.  Recently, I have been focused on the youNEQ project as well as a different digital media project.  I have been blogging a bit on the youNEQ blog and will start cross-posting some of the generally applicable ones over here.  I am also working on some new posts for this blog too.

All my best,


Put Your LLC Operating Agreement into Writing

Wed, 01 Sep 2010 13:14:00 +0000

As I have mentioned several times in the past (here and here), LLCs, while very useful for general business purposes, are generally discouraged when a company is planning on seeking institutional venture capital.  However, despite this general discouragement, folks keep forming LLCs.  This blog post contains some words of advice for those folks.PUT YOUR OPERATING AGREEMENT INTO WRITING.That is the short version.  Here is the longer version.  In Delaware, the state supreme court has determined that, if you have an unwritten arrangement involving an LLC that cannot be performed within one year, that arrangement is unenforceable. For example, say you get together with your other two founders and decide “Hey, it would cost money to hire a lawyer and draft a written operating agreement for our new LLC that we formed on LegalZip.  We’re all buddies.  Let’s just agree and shake hands to split the equity in thirds and to vest the equity with a one year cliff and then monthly over two more years.  That way we all have incentive to stick around.”  Boom, unenforceable.  A Delaware court would likely rule that all the equity was fully vested from day one.  This is not good if you are the founder that sticks around after the other two flake out and go back to grad school.If any of you are junior legal achievers, you might point out that your LLC was formed in Kansas, not Delaware.  So what do you care what a Delaware court says?  Honestly, that is a relatively good point.  Unfortunately, the State of Delaware has a long history of being the “go to” state for corporate formation.  This means that their laws are very well developed in this field – much better developed that almost any other state.  Consequently, most other states look to Delaware law for guidance when they come across interesting issues like this one.  So, even if you are in Kansas, you may still be out of luck.The moral of the story is, put your agreement into writing.  This is almost always the moral of the story, but it is especially relevant to your LLC.  Even if you and your co-founders type up some notes and all sign at the bottom, you would usually be better off than having nothing.  As Samuel Goldwyn said “a verbal contract is not worth the paper it is written on.”   [...]

Please Vote for My SXSW Panels

Mon, 16 Aug 2010 14:29:00 +0000

Hi folks,It is that time of the year when, under the guise of crowdsourcing panel ideas, SXSW gets us to mention them a lot and drive traffic to their site.  Be that as it may, I would still very much appreciate your vote for one or more of my panels...You will have to create a quick account (takes 10 seconds) and then you can give me the green thumbs up (or if you are feeling testy, I suppose you could give me the red thumbs down).My first panel is called:  Eleven Key Mistakes Every Startup Can Avoid.  It is actually not a panel, but a dual presentation that I am putting on together with my friend David Jones, a VC at Southern Capitol Ventures.  We are going to focus on what I like to call the "dumb" mistakes.  These are mistakes we see folks making over and over again that are really very easy not to make.  Also, some of these can be quite painful to fix -- so why not do it right from the beginning?  We are going to run through the 11 mistakes fairly quickly using real world examples and then throw it open to the audience to ask questions about starting up and the quest for VC.  Last year, I felt like there was a real void of and strong demand for a straightforward, nuts and bolts presentation on setting up your start-up to maximize your funding chances.  So this is my shot at providing it.  Here is the link again:  Eleven Key Mistakes Every Startup Can Avoid.My second panel is a bit more technical and is focused on the music space.  It is called Spectrum Bias and Streaming Royalties.  We will focus on the basic fact that the FCC's current royalty system is unfairly biased against internet radio and in favor of FM radio (and to a lesser extent satellite radio). Royalty payments range drastically from zero to a huge number, based solely on the spectrum of the radio wave transmitting the song.  There are some key differences in how the various spectrums can monetize, but it is not clear that this makes up for the imbalance in royalty rates.  As an aside, I originally titled the panel: "Forget the Ocean, It's the Size of the Wave", but my SXSW reviewer thought that was a bit too risque...  My friend Joel Erb from SpotTrot will be on the panel among others.  Click here to vote for me:  Spectrum Bias and Streaming Royalties.I should also mention two other panels that friends have proposed.  The first comes from my partner, Dave Meyers, and it focuses on the long and winding road to an IPO.  It is called Show Me the Money:  Doing the IPO Dance.  Dave is great on this subject and will have a lot of war stories and practical advice on the good and the bad that comes with attempting an IPO.  The second I have mentioned before, but bears mentioning again.  It is a panel on the legality (or lack thereof) of crowd funding a startup in the US.  It is being put on by Fred Bryant at Wealthforge and is called Crowd Funding Your Startup -- Without Going to Jail.Thanks in advance for your support.  More substantive posts coming later this week! [...]

More Thoughts on Crowdfunding your Startup

Fri, 13 Aug 2010 14:17:00 +0000

Today, I attended a great RTP event featuring Mark Cuban.  (Thanks to my friends at Southern Capitol and Intersouth for sponsoring it). The event triggered many thoughts about entrepreneurship that I will share over the weekend.  However, the most interesting part of the event was probably a discussion on the panel that focused loosely on crowd funding.I've recently been thinking a lot about crowdfunding startups and the various legal and regulatory hurdles to making this a reality.  In my mind, our current regulatory scheme is a classic baby/bathwater problem where our government, in the interest of protecting against a small number of bad actors, has instead made it exceptionally difficult for the vast majority of honest, hard working Americans to invest in startups and share in that portion of the American dream.The flip side of this is that our government has made it exceptionally difficult for most startups to find sources of equity capital.  The recent changes limiting who can qualify as an "accredited investor" are just the latest of many examples.On today's panel, there was a great discussion of exactly this issue.  It began with Mark Cuban stating:We don't have a country of investors anymore.His point was that innovation is driven by both entrepreneurs and investors and that, without both, innovation and our country will suffer. Mark's first recommendation was to eliminate capital gains tax on any equity held for more than 5 years.  This would benefit both the founders and their early investors and could provide a huge boost to early stage equity investing in and of itself.However, the discussion continued with Mark saying:There should be a way for more of our money to go into something great.He continued by saying that what we really need to do is "create a different kind of market."  Not the NASDAQ or the NYSE, but a market focused on providing liquidity to early stage companies.  The discussion moved on to the well-documented death of the boutique investment banks that led the IPO boom of the late 90s.  But his point is well taken, the existing public equity markets are no longer an appealing exit for most early stage companies.  And the existing private equity markets are incredibly distorted by regulation which makes them unavailable to the vast majority of potential investors.At this point Aaron Houghton, co-founder of iContact, made the following excellent points:What we need to do is open up the long tail of the capital markets.  If we can do this, we will turn everyone back into an investor.This is exactly right -- the long tail of the capital markets (most retail investors) are only permitted to invest in pubic equities.  And public equities is not where the real innovation and growth are happening in our country.One final note, a good friend -- Fred Bryant from Wealthforge -- is working on solving these issues around crowdfunding startups.  He was picked to potentially do a panel at SXSW on the subject -- you should definitely give him your votes.  Here is the link. [...]

Securities Law Violations -- It Never Ends

Thu, 05 Aug 2010 15:17:00 +0000

I've been working with a baby company.  They have a good idea and have been putting together their formation documents and getting their IP straight.  No serious conversations yet about raising money. Then -- BAM -- on Monday I got this email [certain details removed to protect the guilty]: Howdy!I'm sending you this email because [Super Cool Company] is raising funds for our new project, the [Super Cool Idea].  Its a really cool project where we're getting people around the world to [Augment their Social Gaming Reality in a Consumer Facing, Location Based, Real Time App]. I'll be posting some project updates on it today and in the coming weeks, but I figured I'd send you an email letting you know this is going on so you can follow the progress as we try to raise $3000 from at least 50 investors by the end of August. Please share this with anyone you know that might be interested, we're also looking for developers ([Code Ninja], you'll be getting a call from me soon) and future participants!Thanks, hope you have a great week.-[Clueless Founder]Founder, [Super Cool Company]Congratulations -- you just violated securities law.To be clear, telling your friends or even investors about your company/idea is not a securities law violation.  It is even ok under certain circumstances to email a potential investor and ask for money -- though you need to be careful and should certainly consult with a lawyer before you do so. But what you should almost certainly not do is send out a blast email asking for money.  Even worse, you should NEVER tell people to share your offer with anyone they know who might be interested.That my friend is a "public offering" of securities.  And the SEC has a thing about companies that do public offerings of securities without first registering them. Just remember that an offering of securities must either be registered with the SEC (e.g. through an IPO) or must be "exempt" from registration. There are a whole mess of exemptions, most of which you (and I) will never need to know about. (For example, interests in a railroad equipment trust are exempt. Who knew?).  However, the most important exemption for a baby company is the exemption for transactions "not involving any public offering." That is, private transactions. There are a variety of safe harbors and legal interpretations that help us figure out what a non-public offering is -- you may have heard of Reg. D, which is the most common -- but at the most basic level your offering cannot be made to the general public.  The offering above -- where the founder is urging his buddies to "share this with anyone you know that might be interested" -- is unquestionably a public offering.  Since it is unregistered, securities laws = violated.As I have said before, be safe out there folks.  And please try not to violate securities laws ...   [...]

Two Different Ways to Handle Launch Issues

Wed, 04 Aug 2010 13:24:00 +0000

Last week I had the (good?) fortune of experiencing two separate product launch failures.  Coincidentally, both were for iPad products.The first was Flipboard, a social media reader app that, if you are on the iPad and have not heard of, you are surely living in a box.  After hype that verged on hysteria, the demand for Flipboard apparently far exceeded their capabilities.  Once I signed in, all it told me was that Twitter and Facebook were unavailable. This continued for several days.  At which point (and only if you loaded a new version) you were asked to join a mailing list to find out when you could access Twitter and Facebook.  Almost a week later, I received an email saying -- Hey, you can join!  Except that it was sent in error, apparently to a lot of people.  Later that day, I finally got my actual invite, signed into the site and it subsequently worked for approximately 1 day.  Ever since it has been bolloxed.  No access to the social media sites.  While it still sits on my iPad, I do not feel compelled to open it regularly.  I'll stick to the tools that I had pre-Flipboard which actually work.The second was my Redeye mini, an infrared attachment for the iPad that allows you to use your iPad as a universal remote.  I originally heard of this item months ago and considered it to be one of the killer apps for my iPad.  I already keep the iPad next to me when I watch TV (never know when you might want to check IMDb or bang out a few RSS feeds).  Consequently, I was pretty excited when I got the shipping notice.  Unfortunately, it didn't work.  I was literally twiddling with the settings when I received the email that I've copied here.The letter begins: Dear RedEye mini customer,Thank you for supporting us by being one of the first to purchase the new RedEye mini. As such, it is with deep regret that we write to inform you that we will be recalling the entire first lot of RedEye mini units - all those with serial numbers beginning with C0101.  Although many of you may not have experienced problems thus far, we plan to replace all RedEye mini units with new hardware at no cost to you. Customers who do not wish to receive a replacement unit may instead choose to receive a refund of their full purchase price. There is no need for you to return your RedEye mini to us - if it is working for you, please continue to keep and to use it.  It goes on to discuss an issue they have discovered with the adhesive used by their manufacturer.  They apologize and give you a choice of a free replacement in 3 to 4 weeks or your money back.I'll tell you what, I was a little bit disappointed that the device doesn't work.  But I was very happy with this response and I am confident that I will receive a proper device in a few weeks.Two very different ways to handle a launch issue.  One left me cold and confused, the other left me warm and confident.  The difference was quick and decisive communication. [...]

New Project -- youNEQ

Mon, 26 Jul 2010 02:25:00 +0000

Hey folks,

I wanted to let you know that I am working on a new project that we are calling youNEQ (pronounced Unique).  It is an exploration of personal identity, interior design, custom goods and social discovery.

We have started to blog about it a bit and you can find that here.  I look forward to telling you more about what we are working on as we progress.

In the meantime, I will continue to post my thoughts about entrepreneurship, technology and capital raising here.

Wish me luck,


Crowd Funding Your Startup Without Breaking the Law

Thu, 15 Jul 2010 14:03:00 +0000

I ended up submitting or helping submit three different proposals for SXSW panels.  One of the ones I am most excited about is a panel on crowd funding.  This panel is being led by my good friend, Fred Bryant.  Fred has a company, Wealthforge, that is developing an industry leading standard for the crowd funding of startups that is not only straightforward and easy to use, but that is also LEGAL in the United States.Our preliminary SXSW pitch has the same title as this blog post and read as follows:  Crowd funding sounds pretty awesome. You give entrepreneurs access to a huge new capital source and investors can diversify with minimal transaction costs. Just imagine the innovation that this would create. Who doesn't want to help people pursue their entrepreneurial dreams? As we all know there is money to be made by investing in them as well.  Think of it this way, wouldn't it have been nice to purchase a few shares of a little company named Twitter back in July of 2006? The internet has changed just about everything in the world over the last 15 years. That is with the exception of raising seed capital, most people are still stuck asking their rich uncle for $50,000 (whether they like him or not). Of course there are a few brave souls trying to change this, but it is more like a James Bond movie than a business venture. The US has arcane rules regarding private placements that haven't changed much since they were written; in 1933 (in case the SEC hasn't noticed the world is a little different nearly a century later). These rules and regulations have made crowd funding in the US pretty much impossible. But, as we have all found out over the years, just because the SEC is not a fan of something, doesn't mean it won't happen. Regulation is not the only issue facing this industry. So far nobody has been able to prove the model. Many companies throughout the world are trying to solve these problems but they are all still looking for the answer. The only thing that you can be assured of is that some form of crowd funding will revolutionize the long stagnant pattern that entrepreneurs follow to raise capital. Come hear our diverse panel discuss this and give your input on what the future holds.We'll see how much this changes once the SXSW folks go to work on it.  Anyway, Fred's business is currently in a very early alpha release.  If you are interested in participating, please shoot me an email and I will get you an invite.  Also, for some additional great resources on crowd sourcing equity and the related obstacles, check out this fantastic Slideshare from Kevin LawtonThe Big Bang of Crowdfunding: Startups as a Public Asset Class [...]

Tesla Care Package?

Mon, 28 Jun 2010 15:26:00 +0000

As you are probably aware, Tesla Motors Inc. is gearing up for an IPO early this week.I am a big fan of Tesla and am number 586 on the wait list for a Model S.  The Model S is Tesla's all electric sedan that may or may not be delivered to me in 2012.  I am excited both by the technological aspect of the car and by the prospect of never needing to pump another tank of gas.  This is especially true in light of the recent gulf oil leak.Anyway, although I am absolutely sure it has nothing to do with the timing of Tesla's IPO, over the weekend I received a care package from Tesla.  As you can see below, it contains all kinds of nifty loot.  I have no idea whether they sent one of these to everyone on the wait list, but it certainly renewed my enthusiasm for the company.  To be honest, they've had a bit of bad news recently.If these really did go out right before the offering, it is a very creative way to build pre-IPO excitement by only targeting folks you have a pre-existing business relationship with.  Very well done.Here is the slick looking box it came in:Wow, look at all this great schwag:So let's see, a green matchbox car Roadster, a travel mug, a desk mug, a nice adjustable hat and a t-shirt, very well done:And on top, we have a collectors post card of my Model S and a little VIP kit:And lastly, the t-shirt unfurled, looks like its pretty good quality:So there you go.  I am excited about my next car again.  If you are also on the wait list and received one of these packages, let me know.  I'd be interested in getting more data points. [...]

Should I Shop This Term Sheet?

Mon, 29 Mar 2010 14:36:00 +0000

You've been working hard. You have a product, it's getting traction. You've been getting some interest from various VCs. And then, voila, you've got a term sheet. Now what?I know that for many folks in these difficult times the answer is going to be -- where do I sign. Maybe you only have one investor seriously looking at your company. Maybe you could really use the cash. But there are some companies that have the luxury of competing bidders. This comes up time and time again and it is a very tricky area. On the one hand, you have established conventional wisdom that comes out firmly on the side of "don't ever shop" a VC term sheet. It is considered bad form. You could lose what you've got. It makes the VC feel like they are nothing more than money to you. If you had played the game correctly, you would have already orally agreed to all salient terms, so there should be nothing for the VC to improve upon. Etc.On the other hand, what if there are some terms that you would like to see improved upon? Or, more important, what if you really clicked with a different VC and would prefer for that VC to be the one that you are going to be married to for the next 7 years? Well now you are in a pickle.In these types of situations, I have generally counseled folks to follow the following protocols. (And, interestingly, I listened in on a "panel" at SXSW where Justin Fishner-Wolfson a principal at VC shop, the Founders Fund, agreed with this protocol on almost all points. So there is certainly not unanimity among VCs on this issue.)Shopping term sheets is ok. But only under certain limited circumstances.First, you should never show an actual term sheet. That really is bad form. Rather, you should orally convey that you've got an actual signed term sheet and let the other firm know one of two things -- either they are your top choice because of personality fit and if they come up with a ball park offer you will go with them, or they are in the ball park but if they can improve on one or two key terms, then you will go with them.Second, you can only go back once. It cannot have the appearance of an auction or feel like you are playing different investors off against each other for incremental improvements in terms. Remember, VCs talk to each other. A lot. Chances are quite good that they will catch on to you if you are doing multiple round trips.Third, only ask for things that you really care about. Pick two or three (or one) term(s) that really matter to you and ask for improvement. Don't quibble about silly things like number of demands in a registration rights agreement or number of days notice you need to give on the right of first refusal. Stick to what really matters to you, explain that the competing investor gave better terms in that area and ask for the improvement.Fourth, if the VC concedes to your request, then you should accept their term sheet. It is NOT ok to then go back to the first VC and ask for further improvement. Etc.Finally (and most important), never shop an "oral" term sheet. Another word for an oral term sheet is diddly-squat. If you don't have it in writing, it doesn't exist. Just because a VC told you that they "feel really good about getting you a term sheet soon", it does not mean you have a term sheet. Trust me, VCs talk. They will figure it out if you are shopping something you don't really have. And then you really will have nothing. [...]

Six Things Not To Do When Pitching for VC

Wed, 24 Mar 2010 13:43:00 +0000

Here are six common sense pitching tips I gleaned from various SXSW discussions. Hope they come in handy.1. Leave the jargon at the door. The folks that you are pitching have to hear dozens of pitches a week. A buzzword that sounds hot to you, sounds obnoxious and stale to them. Keep it simple and just explain why your business model is great. 2. Ask everyone for advice, but DON'T take it all. When you are fleshing out your business, you should bounce it off of as many smart people as you can. Potential investors. Potential mentors and peers. Potential employees and co-founders. Potential drinking buddies. Who knows where you will gain insight. Generally, you shouldn't worry too much about someone stealing your idea. In the consumer-facing internet space, just about every company has at least three clones out there somewhere. (Obviously, in some sectors where IP is paramount, you should disregard this advice, e.g. Life Sciences, Cleantech, etc.). What will make you successful is your team and their ability to execute on the idea, iterate quickly and pivot when necessary. More feedback is better. But, don't feel the need to incorporate everything everyone says. Show your founders intuition and filter the good from the bad. The only thing worse than a half-baked idea is a pitch deck suffering from feature bloat. Which leads to ...3. Keep your pitch short and sweet. Don't let it get longer than 20 to 30 minutes and 10 to 15 slides. If you feel like you need more than that, then consider the possibility that you need to learn more about the essence of your business. Work on refining it. 4. Don't make unrealistic projections. Everyone needs to do a TAM analysis of some kind or another. And it is incredibly tempting to find a $50billion market and say to yourself, hey, if we only get 3% market share we will be doing $1.5billion a year in revenues. Sweet. Let's be honest here -- that just simply isn't going to happen. And your potential investor knows this. It is much more impressive if you can do a bit of research and leg work to develop your market from the bottom up. You can still come up with some pretty wild projections, but at least you will have established the metrics against which you should be measured.5. Please don't argue with the person you are pitching. You aren't going to convince them. They don't like it. Really, no one wins here. If you disagree with a point someone is making, let them make it, respectfully disagree, maybe give a cogent counter example, and then agree to move on. You can still have a successful pitch -- and, in fact, you can use the disagreement as a reason for an additional touch. In a few days, you can contact the person you disagreed with and supply them with strong evidentiary support for your position. Data and proof will overcome most doubts. Also, by following up you will show good qualities to the investor, like follow through, sticktoitiveness and initiative. Arguing just irritates people.6. Don't get hung up on the pre-money valuation. Too many entrepreneurs meet their waterloo over valuation at the A round. Not only is this shortsighted with respect to future rounds, but it may very well cause the entrepreneur to miss other important issues in the current round. With respect to future rounds, keep in mind that you will suffer much more dilution in a down round if the current valuation cannot be sustained, than you will by doing a reasonable pricing now and a much higher pricing in 18 months when you are raising 5 to 10x the capital. With respect to the current round, keep in mind that the base pre-money va[...]

Back From SXSW, Alive and Kicking

Wed, 24 Mar 2010 03:31:00 +0000

Now that I've been back from SXSW for a few days, I've had some time to catch up with my backlog of work and emails and collect my thoughts. I met a lot of really interesting people and learned a lot (though typically not by attending the official panels). I am sorting through my notes and will refine them into a few posts over the next couple days. I'm looking forward to posting again!(image)

Deep in the Heart of Texas!

Thu, 11 Mar 2010 21:46:00 +0000

Am I the only one that has an urge to test this every time I arrive in Austin?

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4 Thoughts on How to Get Funded by VCs

Tue, 02 Mar 2010 15:13:00 +0000

Last week at the Southeastern Venture Conference, I listened to a panel called "2010: State of the Venture Market." The panelists (Jack Biddle from Novak Biddle, Bob Hower from ATV, Dan Marriott from Stripes Group, and Lou Volpe from Kodiak) ranged pretty widely across the venture capital landscape and touched on some great insights for emerging growth entrepreneurs. Below in bold are 4 quotes that I found particularly interesting with my thoughts following.1. "You need a big idea." -- Bob Hower. This may seem obvious. Why start an emerging growth company if it is not based on a big idea? But it seems that almost every day I am approached by an entrepreneur with an idea that is just obviously not big. Maybe it is a great feature for another product? Maybe it is a neat app that few would actually pay for? Maybe it is a niche product that people would pay for, but there aren't that many people in the niche? Nevertheless, what these concepts have in common is that they do not have BIG potential. By big potential, I mean they do not have a chance to achieve massive scale or massive profitability. The thing about early stage venture capital is that for the VCs business model to work, they need to see returns of not 3x or 10x but 20x or 50x. That is because out of 20 portfolio investments, VCs anticipate that only 2 to 5 will be successful. (YMMV depending on the VC.) The typical VC is not interested in a 3x exit with a high likelihood of success. He is really looking for the homerun and the 50x exit. Consequently, every company he backs must have that home run potential. If you are really just a feature or a niche product, my guess is your TAM is not going to get a VC that excited.2. "I need to know that you're not just making it up -- you need a single objective data point." -- Jack BiddleIn a word -- you need TRACTION. Your big idea is all fine and dandy, but can you prove that it works? VCs in 2010 are just not investing in two guys with an idea sketched out on a cocktail napkin (likely over cocktails). They need data points. Now, this doesn't mean that they need to see profitability or even revenues. But it does mean that they want to see that you have something that people are interested in using. Can you show adoption? Can you show a nice upward trend in hits? New users? Retention rate? Or some other metric that accurately captures why your idea is great? In a technical field, do you have your patent? Have you successfully completed Phase I clinical trials? Etc. The point is, you need to give your VC a hook to hang your idea upon. Just one single objective data point ...3. "You have to be able to sell for a valuation that has no rational relationship to your earnings power." -- Jack BiddleThis is similar to the "big idea" requirement, but is more nuanced. What this is really getting at is "what is your secret sauce"? Is it a hot new technology? Is it a rock star team? Is it a revolutionary now business model? How can you justify to a buyer that they should pay a 12 or 18x multiple on EBITDA when competitors are selling for 7x? How do you justify a $3B pre-money valuation when you have not earned a single cent but you have traction that is through the roof? These mysteries are what make working with emerging growth companies such an exciting opportunity. And the perceived presence or lack of a "secret sauce" will often prove the difference between finding VC funding and not. 4. "Immediately out of the chute [an early stage company] will have in[...]

Upcoming VC Events in the Southeast

Wed, 17 Feb 2010 14:23:00 +0000

I was just looking at my calendar and thinking about how busy things are going to be. There are lots of good venture capital oriented events coming up in the next few months. If you are thinking about raising capital or if you are doing something innovative in the Southeastern United States, consider attending one or more of these. Also, let me know if you will be there -- I always like meeting folks that are doing interesting things. And I am always good for a coffee or beer!I am attending the following big regional/national conferences:- SEVC: The Southeast Venture Conference. February 24 and 25 in Tysons Corner. I will be up in Tysons for most of the week, so let me know if you can connect.- SXSW Interactive: The mecca for US emerging technology, gaming and eCommerce companies. March 12 through 16 in Austin, Texas. I will be in Austin starting on the 11th. Let me know if you are in town and we can definitely meet up.- CED Venture Conference: Bringing together the best and brightest in the RTP region. April 20 through 22nd in Pinehurst, NC.- MAVA's Capital Connection: A great conference at a new time. May 19 and 20 in Baltimore, MD.Also, for the Central Virginia folks, we have some upcoming Venture Forum events:- This Thursday (2/18) we have a Venture Out event at the Bull and Bear Club. This one is co-sponsored by my friends at Transact Capital and Deacon, Norman & Anderson. And, as usual, there will be plenty to drink. I am particularly happy that DNA (Deacon, Norman & Anderson) are co-sponsoring. They are an excellent client and I am excited to see their development.- On 3/18 we will have a Venture Forum luncheon. The topic is still TBA, but I guarantee it will be a good one. Stay tuned.- On 4/15 we have another Venture out and then on 5/20 the last Venture Forum luncheon before the summer. Make sure you put them on your calendars.Every time I go to one of these events I meet some of you who are out there innovating and also reading me on this blog or on Twitter. Keep up the great work! [...]

MC Escher in Legos

Tue, 16 Feb 2010 02:53:00 +0000

I really wish I had made this. So cool.

Check out its construction on the original blog. Its creator, Andrew Lipson, has also made a bunch of other cool stuff.(image)

The Basics of Film Financing

Sun, 07 Feb 2010 12:00:00 +0000

It's been a few years since I have been actively involved in film financing. I left LA in 1995 and have only been back since for weddings and funerals. However, recently I've been seeing some term sheets for films again and it has reminded me that the basic structure of a speculative film financing is quite different than what you see in a VC or PE style investment in an emerging growth company.Typically, the first thing you would do for an independent film investment vehicle is set up an LLC for each film. The angel (production development) investors would then put in the initial capital. The interesting quirk is that these angel investors are typically cashed out upon first round/production financing. This is a significant difference from a technology/emerging growth company, where the angels or seed investors are expected to stick around for the long haul -- no one is taking any money off the table in an emerging growth deal.In film financing, the angel round/development financing will range from $150k to $500k, with the production round ranging from as little as $1.5mm all the way up to $10mm or more. From time to time you will see a combo debt/equity investment in the development round, but this is much less common than in emerging growth. Also, unlike emerging growth where the bridge debt will convert into the next equity round, in film financing you will almost always cash out the debt and then give the debt investor the right to participate in production finance round -- the right but not the requirement to roll over the investment. Another interesting difference is that development costs are built into the overall budget that is financed with the angel financing, so these development costs are almost always recouped when the actual first round production financing is obtained. As you can see, production development financing for a film concept, although superficially using similar terminology to an emerging growth company (ex. angel investment, first round financing), is really quire different. If you are not familiar with it and are thinking about investing, you should definitely consult with someone who is -- otherwise your assumptions may lead you astray. [...]

Open My Eyes That I May See ...

Fri, 05 Feb 2010 20:35:00 +0000

I wonder what the monks would think about the iPad?


Thanks to Steve Blank for finding this.(image)