Colorado Startups written by David Cohen

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A rededication

February 20, 2009

When I first started this blog on March 7, 2006, I had one thing in mind. I wanted to become visible as an angel investor in Colorado.

So in 2006, I figured I’d start covering companies. I started off doing so very diligently, spending real time covering interesting new companies like Rally and OpenLogic and Photobucket. And it was fun to be among the first in the country to blog about the Sketchup acquisition by Google and get hat tips from national blogs. I didn’t have my voice yet, and I was doing news-like stories, like you might find today on the excellent news site TechRockies. At that time, nobody was really focused on doing a TechCrunch for Boulder type of site. So I just naturally started doing that as I was meeting companies and looking for angel investments. It was a fun way to give some exposure to interesting new companies in the area.

As 2006 progressed, I started mixing in some general startup thoughts originating with others that I thought were interesting, and began mixing in some of my own experiences into the blog. All the while, I kept doing company profiles such as the birth of Lijit. I also mixed in some thoughts from some local events I went to like BarCamp.

At the end of 2006, after less than a year of blogging, I asked the readers for feedback. I said:

80% of my top ten posts were based on my experiences, observations, and advice. 20% were coverage of new Colorado startups. Clearly this tells me that I should keep writing the first type of post. The real question is: How valuable are the posts about new Colorado companies to you? Please comment on this so I have a better feel.

Reading that now, I can sense that even back then I enjoyed one type of post more than the other. Although the comments on that post were mixed, most people wanted to see a balance of both types of posts. So, always the CTO, I kept doing what the customer wanted. I wouldn’t learn until later that you blog for yourself, not for your readers.

So throughout 2007, I stuck to it, and tried to please the readers by covering lots of companies. This was helping me with my goal of visibility as an angel investor too, so it was fine. At the end of 2007, I had covered about 200 companies in the area in some way or another. And I had written about 200 more posts about my experiences or general thoughts on startups.

In the second half of 2007 my world changed significantly as I kicked off the first TechStars summer. My blog posts per week declined sharply. I was writing once every week or two, and it started leaning much more towards experience posts. I tried bringing on a few more writers to handle company coverage, but they had no real incentives to do a good job and quickly gave up the ghost. In 2008, it returned to “just me” and I probably only covered a dozen or so companies. But I kept blogging my experiences and opinions that I thought were relevant to startups.

Then more things started to change.

My twitter account naturally replaced much of my blogging. I honestly believe that if you want to know what events are going on around Boulder and hear the breaking news, you just have to follow a few people and you’ll hear plenty about that. There area handful of folks here who are in the startup scene and tweet anything of local interest regularly. It’s just easier to tweet the small and less thoughtful stuff than to blog it. So I quit doing that with the natural growth and relevance of twitter.

It’s hard for me to cover the events and new companies effectively. It takes real work. You can either do blurbs like TechRockies does, or you can do detailed and opinionated posts like I used to do. Now you’ve got RockyRadar who is on the scene, which I’m really happy about. They’re doing a great job of covering the events and new companies, and I feel relief. Their scope is a little broad for my interests, but it’s still hyperlocal and relevant. But these guys are working around the clock to do a good job. Trust me. I can’t do that anymore with TechStars happening in two cities and all my other small projects going on.

The gaps have been filled, and my goal has changed. I think I’m fairly well recognized as a visible software angel investor in Colorado. Now my goal is to share the experiences I’m having and lessons I’m learning that come from being directly involved in dozens of startups every year. It’s simple really - this blog is going to be what it’s already naturally become.

I won’t be soliciting or tracking down companies just to give me interviews or tell me what they’re all about just so I can cover them on the blog. This doesn’t mean I don’t want to hear from them - I’m still actively investing. But I’ll let RockyRadar, W3W3, and the gang handle the news about these companies. Instead, I’ll try to blog more about what I’m passionate about: Startup ideas, angel funding, entrepreneurial ecosystems, tips for founders, and the like. If I naturally come across really interesting new companies in the area, then sure - I’ll still share my opinions on them.

So nothing is really changing from what you’ve been seeing here lately. I’m just focusing a little more on the unique value that I think I can provide, and on what I am doing and want to be talking about these days.

Apparantly there are 1400 of you who subscribe to this blog, which blows me away. Thank you for sticking with me and providing feedback along the way. As always, I’d love to hear your thoughts.

Written by David Cohen · Filed Under Blog · Comments

Look beyond the valuation

February 7, 2009

I received this question today via email:

… I am a young entrepreneur… I am currently involved in a… start up… We are currently in the process of raising a friends and family round of funding, and right now we are struggling with the valuation. I am looking at the TechStars framework (a $300,000 post-money, if my math is right) because it appears outwardly that we are at a similar stage of business development compared to the TechStars companies. However, I would like to confirm with you what stage a typical company is when they apply for TechStars? We currently have a BETA test version of our website up with 1700 members, and we pull about 2000 uniques per month. I am wondering if we are on par with a 300K post-money?

I’ll come at this answer two different ways. First, I’ll address the flawed thinking inherent in simply comparing your company to another known data point based solely upon valuation. Second, I’ll address the question of how to think about and possibly determine a fair valuation, especially in the peculiar context of a friends and family round.

TechStars is providing much more than just money. It’s providing access to extensive mentorship, a very large network, a community of startups, office space, legal work and other free services, a platform for credibility, and access and opportunity with literally hundreds of investors. It’s unlikely that friends and family will bring the same resources to bear. It’s more likely that they’re simply bringing money. Clearly, it’s not going to be an apples to apples comparison. So in order to compare a TechStars valuation to a friends and family valuation, you first need to somehow determine the value of all of the things that TechStars brings to the table. Unfortunately, this is not easy to do. The value is in the eye of the beholder. But clearly, a simple comparison is flawed thinking.

More broadly, the lesson here is that you can’t simply compare valuations in any context. Valuations tell only a small part of the story. “When” matters: Consider the average startup valuation a year ago vs. today. “Who” matters: Consider Bill Gates doing his next startup that is exactly like yours, vs you doing it. Or consider who the investors are. Investors who bring more to the table might well deserve a lower valuation. Even “Where” matters: The same startup in Silicon Valley is probably going to draw a higher valuation than if it were located in rural Iowa.

Now that I’ve cleared that up (I hope) and all the readers from Iowa are gone, let’s address the part of the question pertaining to coming up with a valuation for friends and family. This is really tricky, because in my experience it’s very easy to drive an extremely high valuation in these scenarios. Usually, friends and family are investing in you, and will not pay so much attention to the valuation. They’ll often trust your judgment above theirs (which is part of what makes them “non-professional investors”). Depending on all of the factors I’ve described above, typical web company startup valuations run somewhere in the $1M-$3M range, pre-money. From what little context I have from the email, I’m guessing the startup in question would be valued on the low end of that range, assuming investors wanted to do the deal in the first place. With professional investors (angels and venture capitalists) this simply turns into a negotiation. There is no magic formula - it’s simply a number that both parties can agree to. But with friends and family, given the dynamic, I generally recommend a completely different approach.

With friends and family investors, the right approach for companies that think they may want to raise more money in the future is almost always going to be to use convertible debt. Instead of issuing equity, you can simply document it as a loan to be repaid with interest potentially with a right to have their money “converted” at the next value event (funding or acquisition) based on the valuation that is assigned at that point. Often, a small discount (10-25%) will be offered so that early investor gets additional equity at that point as compared to those bringing in the new money. The benefit here is that the valuation at this next value event will typically be assigned (and negotiated) by an acquirer or by professional investors. It avoids the whole messy discussion of valuation with friends and family, and feels “fair.” The other benefit is that it’s likely that venture investors are going to want to buy out any friends and family investors when they do a large financing. Using a debt instrument makes this an easy step, while still rewarding your early friends and family investors.

Now, you may be wondering if this advice is in conflict with other advice you might have heard about “misalignment of interests”. After all, if you raise a debt round, isn’t it going to be in your investors best interests to keep your next valuation as low as possible, so that they get the maximum effect from conversion? The answer is yes, which is why I generally recommend and use preferred equity in most of the deals that I participate in. However, I’d submit to you that in the case of friends and family, they’re unlikely to take that point of view for the same reasons that they’re unlikely to push valuation as an issue in the first place. Finally, another benefit is that it’s less expensive to create legal documentation for a debt financing than for an equity financing.

In summary, I generally recommend using a debt instrument for a friends and family round. I also think that it’s critically important to look at much more than the valuation in order to truly understand any equity financing.

Written by David Cohen · Filed Under Ask-The-Angel, Blog, Venture Capital · Comments

Venture Capital in the Rockies presenting companies announced

February 3, 2009

I was on the selection committee for this years Venture Capital in the Rockies conference. We had some really interesting companies to choose from this year, and it took a few more conference calls than normal to get down to the final group this year. Here’s the list of companies that will present.

Hope to see you there!

Written by David Cohen · Filed Under Blog, Startups, Venture Capital · Comments

What’s the job market like in Boulder?

February 1, 2009

During the Boulder.me Startup Job fair that we did in October, Jobing.com came out and shot some video during the event. They wanted to capture what the tech scene was like in Boulder, what jobs were hot, etc. Here’s the video they came up with starring me, Andrew Hyde, and Ari Newman of Filtrbox.

Of course, this is a bit dated now - there are probably not quite as many jobs in town as there were at the time this was shot. But, comparatively, it’s still a great place to be for people hunting software jobs.

Written by David Cohen · Filed Under Blog · Comments