Getting follow-on funding… after failing to achieve sales

August 25th, 2011 → 10:44 pm @

Several of the companies I’ve invested in have missed their sales targets and are chasing follow-on funding right now.  The Boards have different problems and different approaches to their situation:

Company A has failed to get its product sold in the market, and lost the confidence of some investors.  The Board still believes in the business’s future, and has explained to shareholders that they have a new strategy for entering the market.  Still, the shares are being offered at a heavily discounted price, reflecting the company’s failure to date.

Company B also got into trouble in the market.  In their case, some poor management, compounded by a large European partner going bankrupt left them out of cash and without a significant sale.  The Board hesitated to ask investors for more money to back a relaunch.  Instead, directors worked for many months to find a new way to leverage the company’s intellectual property… and removed the managers. They now have a new story for investors but have had to heavily discount the shares for the new round.

Company C lost both of the two main market opportunities they were chasing.  In each case the deals were lost at the end of a long sales cycle.  But, unlike Companies A and B, Company C had continued to develop an impressive sales pipeline, lodged extra patents, built a strong team, and achieved a surprisingly good brand position (for a startup with no sales!).

While Companies A and B are begging investors for more money, Company C is able to say, “Well, we missed our sales goal (and are hence out of cash), but look how strongly positioned we are!” Company C is delayed, but still on track, and investors will still be asked to fund at the rate of the previous round. (more…)

Angel funding

Chaos in the Cap Table

June 29th, 2011 → 2:56 pm @

I’ve just been working on the capitalisation table for a startup company.  We’re preparing a funding plan to take the company right through to IPO or trade sale, and need to capture all the commitments made now, or likely to be made, to fund the business.

That sounds pretty simple, but it’s amazing how quickly a cap table can turn into a nightmare… and high-growth companies are particularly susceptible because it’s all happening real fast. 

One day you’re sitting with a shiny new founder who owns 100% of his company, say 10000 shares, all in common stock.  The next thing you find is that you’re burrowing through a sea of obligations.  Here’s what can happen: (more…)

Angel funding

146 days to raise funds

February 21st, 2011 → 12:47 pm @

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I’m returning from the conference of the Australian Association of Angel Investors. Their conferences are world-class, and Angel Investors can learn a lot by attending.

Among the other information presented was the average time to close a deal during 2010… 146 days.

What is reasonable?

Is it reasonable that deals take almost five months, on average, to close?

When I was an entrepreneur trying to raise money, I was always disappointed, and sometimes angry, at how long it took.  Occasionally I’d be in a situation where an investor would hear the elevator pitch, get excited by the opportunity, and write a check immediately; but more often, I went through the long grind of presentations, due diligence, and terms negotiation.

Now I see things differently.

Why I changed my mind

The Angel Investors aren’t looking for a one-night stand.  They want a meaningful, long-term relationship with an entrepreneur they can respect and trust.  So entrepreneurs who do get the quick cash may find they’ve been funded by passive investors who will bring little extra value.  The investors who take the time to get to know the founder, and the business, are more likely to back up their cash commitment with advice, contacts, and perhaps Board work.  Taking a long time to raise funds can be stressful for the entrepreneur, but it allows time to form high quality investor/entrepreneur relationships.

Quick deals versus slow deals

Of course, just as a quick deal may be a great deal, a slow deal may also be poor one.  Some investors do waste a lot of time in their processes, encouraging entrepreneurs to present to them even when they have no intention to invest.  Such people are, in my experience, the exception.

Most investors are as keen to get the deal done as are the entrepreneurs.

The difference is just that most investors have learnt to avoid one-night stands.

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Angel funding &Blog &Start ups

Obnoxious Angel

January 25th, 2011 → 8:58 am @

The founder and I entered the boardroom where the Angels were waiting for us.  We did introductions, and the founder started his pitch.  This founder is good at pitching, so I didn’t have to say much.  I spent most of my time observing the Angels. One of them was very aggressive.  He used all the body language and verbal signal games that men display to establish dominance (aggressive questioning, interrupting, finger pointing, and so on).

I briefly imagined him as a gorilla, bouncing up and down with bared teeth, and shrieking at the founder… ok, it wasn’t quite that bad. But he was definitely making a power play. (more…)

Angel funding

Sharing the wealth

November 15th, 2010 → 3:58 pm @

At the NZ Angel Association conference in Nelson last week, some investors ruefully commented that many of their investments seemed more like charity.  But none complained about the ‘social-good’ element inherent in supporting new entrepreneurs and new businesses.

The challenge

Then, over dinner, a couple of successful investors talked about the money and time they were putting into assisting the poor and disadvantaged (I have a dream and  Jasmine )… and challenged the rest of us to join in.

The reaction of the room was uniformly positive.

I wasn’t surprised, as I knew that many of those present were quietly sharing their wealth already. But it did make me think about values.

What values should an Entrepreneur have?

Do we focus only on creating wealth, and risk having a tier of wealthy people controlling all the resources while most having nothing?  Or, do we focus on sharing the wealth, and risk having the wealth-creators give up (as they did in the Soviet Union for many years)?

I favour a culture which embraces the wealth-creation of entrepreneurs and investors but provides them recognition for what they’ve shared (both money and time) rather than for how much money they’ve made.  So, I was very pleased to see the Angels applauding the good works of their peers, rather than the financial success which allowed them to be so generous.

It’s important to recognise the moment when the entrepreneur finally gets a big payday, after years of effort and risk.  But the measure of the entrepreneur’s character is, “What do they do next?”

It seems to me that more and more successful entrepreneurs and investors are choosing to give back their time and money rather than just retiring to the beach.  We should applaud them for that, and create a society which rewards both wealth-creation and wealth-sharing.

Angel funding &Entrepreneurship

Do Angels invest before real sales have been delivered?

September 28th, 2010 → 11:26 am @

In the last couple of weeks I’ve met several times with a client who’s about to do an Angel funding round.  Like most entrepreneurs, he values his company based on its potential rather than on what it’s actually delivered. 

He points to the enthusiasm with which his product is being greeted by key players in his target market, and to his worldwide patents.  I point to the fact that he has not yet got his first paying customer.  He enthuses about the scalability of the business, while I highlight the risk factors which stand between him and success. (more…)

Angel funding