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Beers with Brad (Feld, that is)

February 4, 2010

BoulderBeerHeatRave 012 plus_sign brad-cropped

 
KGNU is having a Beers with Brad (Feld) event, a benefit for KGNU at the Twisted Pine brewery (in the brewery itself, not the tasting room!) on Feb. 18th – 6-8 pm. It’s the first BWB event in Boulder in a very long time. If you like beer, and you like Brad, you should go.

The details are available at http://beerswithbrad.eventbrite.com/, or twitter @beerswithbrad.

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

Open Angel Forum – Colorado bound!

January 15, 2010

By now, I’m sure most of you have read about the ongoing debate about charging entrepreneurs to pitch. I’ve tried to put together a chronology of links about this, but I’m sure I’ve missed some great ones. You had:

As with many things, it’s easy to bitch. So when I heard that Jason Calacanis was attempting to actually do something about it, my ears perked up. I started following his new concept, the Open Angel Forum. By email, I somehow got myself invited and I flew to LA yesterday for the inaugural Open Angel Forum. It was held at a beautiful home with one of the angels playing host (thanks Matt!). It was a great event and both the angels and entrepreneurs seemed to really love it.

Jason describes the Open Angel Forum this way: “The Open Angel Forum (OAF) is dedicated to providing entrepreneurs with free and open access to the angel investors that they need. We are firmly committed to fighting against “pay-to-pitch” schemes.” You can read the full mission and rules here.

While it’s hugely important that OAF is free to entrepreneurs, there are a few other things that strongly attracted me to the format of the Open Angel Forum. First, each chapter was to be organized by a well-connected angel investor and was to be limited to about 15-20 angels in attendance. Every one of those angels had to qualify as someone who has made at least four angel investments “of note” in the last 12 months. Because of this, the turnout in LA was truly stellar. It wasn’t just locals – many others had flown in like I had. Ron Conway, Chris Sacca, Shervin Pishevar and many more joined an awesome local crew including Mark Suster, Matt Coffin, and many more. Jason did a good job of sticking to his guns, turning down a bunch of late requests by angels to attend. Because of that, it was a manageable but top notch crowd of about 20 very active angels. Frankly, I was pretty blown away and honored to even be there.

Next, rather than some artificial process for selecting companies to pitch, the local OAF chapter just collaborates to invite companies that they’re seriously considering funding. Essentially, all the presenting companies are sponsored by one of the angels in attendance. This stops the angel group meeting from being the typical “watch and snicker” event which is not helpful to anyone. Rather, every single one of the companies presenting is a legitimate investment opportunity. Certainly, I think there’s a place for “unknown” companies to present at angel groups, but I’ve always said that if you can’t impress just one member of the group, perhaps you really shouldn’t be there. Pitching to a room full of strangers is also generally not helpful. In fact, this is one of the core things we teach at TechStars about the fundraising process.

But then came a moment at the Open Angel Forum last night where I knew this was a fantastic event that had to be replicated. I think it was the founder of Backupify, who, right in the middle of his pitch took a swig from his beer. I remember thinking to myself “I’ve never seen THAT at an angel event before.” Trivial right? I don’t think so – this was the first angel event that I’ve ever attended where the entrepreneurs who were presenting actually seemed comfortable. Relaxed even. I think it was a tribute to the atmosphere. Sipping your beer while presenting sort of became an instant tradition at OAF.

I’m proud to announce that Jason has asked me to run the Colorado chapter of Open Angel Forum. I instantly jumped at the chance to try this in Colorado, and I fully intend to transplant the “sip of beer” tradition here. I’m announcing today that the first Open Angel Forum Colorado (OAFCO) event will be held on February 3rd in Boulder. Jason Calacanis will be attending in order to help us kick it off right, and I’ve also talked him into talking about the Open Angel Forum and why startups should avoid paying to pitch at the February 2nd New Tech Meetup.

At the first OAFCO event on the evening of February 3rd, we expect a similar format: 10-15 angels and 5 companies. If you’d like to attend as an angel investor, please let me know. Likewise, if you’d like to present your company at the first OAFCO event, please fill out this form. Note that presenting companies and angels don’t have to be from Colorado. Like the LA event, I’m hopeful that we’ll have great angels and companies from all over the country at the first Colorado meeting. If it’s interesting to you, come join me, Jason Calacanis, Brad Feld, and many more investors at this special first OAFCO meeting in Colorado. There are also tickets available for service providers – as Jason explains on the Open Angel Forum web site – this is how the event is supported. Only five tickets are available, so if you’d like to attend and help sponsor the event, head here before they’re gone.

I’m excited to try this new format out here in Colorado. There are a bunch of other chapters being started in cities all over the country, but I won’t steal their thunder. Suffice it to say that each chapter is being run by some great local investors. So again, I feel honored to be given the baton for Colorado.

I’d welcome your thoughts in the comments!

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

Internet Business Models of the TechStars

November 7, 2009

I’m a guest lecturer for an executive MBA class at Denver University later today. I was asked to talk about Internet business models (among other things), so I thought I’d take a look at the 39 companies that have been through TechStars to give them a sense of the relative popularity of various business models. I think this represents a fairly decent cross section of reality, since about 75% of these companies have raised outside funding after TechStars ended.

Some of these are open to interpretation or are really a hybrid of a couple of forms. My categories might be somewhat arbitrary. But here’s the data as I see it:

SaaS (33%) – These companies sell their product to customers via the web, and don’t bother with a “try before you buy” product. Examples include Rezora, SendGrid and Filtrbox.

Freemium (20%) – These companies give away a free product, and then try to upsell more sophisticated features or solutions on top of that. Check out Baydin and TimZon.

Sell Installed App (5%) – I broke this out from SaaS, because these companies are actually selling software that is licensed and physically installed. Subtle difference these days. A good example is RedLaser from Occipital.

If you add the three approaches above together, you get 58%. So well more than half of the companies we’ve funded are ultimately selling software to people who pay for it. Novel idea, huh?

Gather/sell eyeballs (18%) – You might call this the “advertising” model, or the “underpants” model. Some call it “audience aggregation”. Some of the companies which achieved early exits were in this category (Socialthing, Intense Debate) , but it’s quite risky too. Often, companies doing this initially have other models in mind once they reach a critical mass but can’t use that approach early on because they don’t have enough scale.

Marketplace (13%) – These companies try to aggregate buyers and sellers, and generally take commissions or service fees for providing the marketplace. Foodzie and oneforty are examples.

Lead Gen (5%) – These companies often provide a valuable free service, and then provide qualified leads to buyers. This is very similar to the Freemium model, except that the upsell is not more software, it’s other services or software provided by someone else.

Virtual Goods (2%) – This model typically involves providing a game or other interesting virtual environment and then selling virtual goods in that environment. J-Squared Media’s MiniPlanet is a strong example.

Crowdsourcing (SaaS) (2%) – These companies use the power of a large distributed workforce, often to do things that computers can’t do automatically or efficiently. Typically they ultimately deliver a service to the customer. Retel Technologies is a good example.

Content Production (2%) – Although it’s a perennially unpopular approach with investors, these companies create content and then attract an audience for that content, typically selling advertising inventory targeted at the audience or subscriptions. Howard Lindzon’s WallStrip is an example of this approach that worked well.

Enterprise 2.0 (0%) – I was surprised to see that we haven’t funded any companies (yet) that are taking web 2.0 consumer technologies and applying them to enterprise settings. Some companies I know of that are doing these sorts of things are Yammer and Brainpark, as examples.

So there you have it. If you’d categorize the models differently, please let me know in the comments.

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

An offer to Funding Universe

September 22, 2009

UPDATE: Funding Universe posted a response to this post and has now waived pitch fees nationally as a result.

Funding Universe is expanding their presence in Colorado and they are presenting a CrowdPitch event on September 30th in Denver. It costs $125 to present your company there, and it’s free to attend otherwise.

Some of us vomit when we hear that promising entrepreneurs are being charged to pitch to investors in Colorado (or anywhere). I’m hoping people will stop doing it. In my opinion, If investors want to see companies they (or sponsors) should bear the costs instead of the entrepreneurs.

To be fair, CrowdPitch is an event that is geared towards to general community and not specifically towards investors. It’s designed as a fun investor role-playing “monopoly money” type event. But still, it’s a bummer that companies have to “pay to pitch” in any setting.

So to welcome Funding Universe to Colorado, I’ll offer to pay the presentation fees for half the companies if they’ll match me.

In any event, here’s some more information about the event:

Want to pitch?

At LivePitch early stage entrepreneurs have 4 minutes to pitch to a panel of experts and a live audience of 40 - 70 peers in order to:

1. Discover investor insight.
2. Let the community know what resources are needed to move forward (partners, services, funding, connections, talent).
3. Gain visibility in the business community.

Want to attend, but not pitch?

Attendance is free. You’ll learn how investors think, meet the hottest start-ups in Colorado, and have a lot of fun. You’ll also help decide the winner of the event by investing your monopoly money in the business of your choice.

When and where

When: Wednesday September 30th
Time: 12:00 - 1:30 pm
Where: TAXI
3457 Ringsby Ct.
Denver, CO 80216

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

More on LLCs

March 29, 2009

Two days ago, I lamented about how much of a pain LLCs can be for investors. The comments were lively.

Many people pointed out the “double taxation” issue involved with C corporations. C Corporations pay taxes and then when money is removed from the corporation to the investors or founders, another round of taxes is imposed. On the surface, this is a good argument for an LLC but it turns out to not have much of an impact in reality much of the time.

The other issue that people pointed out is that valuable losses can be passed through to the personal taxes of the investors and founders with an LLC. While this is also true under ideal circumstances, it turns out to not be true at all in most common cases.

Victor Fleischer reached out to me by email with a thorough research paper called “The Rational Exuberance of Structuring Venture Capital Startups” he had written on this very topic in 2003. I found it to be very educational and I think you will too. It’s absolutely worth a full read (10 minutes or so) - and it’s not as long as it looks because there are many detailed footnotes and supporting references.

Here’s the gist of his paper as I read it. Many observers of the venture capital industry believe that VCs ignore LLCs primarily because C corporations are the devil they know, and secondarily because they’re focused on gains only and are not typically major participants in losses (since they are investing other peoples money and not their own, primarily). This paper goes a long way towards showing why professional investors prefer C corporations and includes many potential surprises such as:

  • Tax losses are often not as valuable as they seem on paper as tax rules prohibit many investors (and entrepreneurs) from capturing the full benefit of the losses.
  • Corporations are less complex than partnerships. “Friction” costs associated with LLCs may make legal costs substantially higher over time for LLCs.
  • Gains are taxed more favorably when companies are organized as C corporations from the beginning (vs converting late, if that is even legally possible).
  • Employee compensation issues are much more complex with an LLC than a corporation. This can cost more and can devalue “options” equivalents coming from LLCs.

In short, at least in my mind, much of the argument for LLCs as being more tax efficient ends up being an illusion and only true “on paper.”

I hope that this starts another big argument. Blogging is for learning, and your comments and participation are really helping me learn. I thank you for that.

Keep in mind the paper is a little old and some tax laws may have changed in the interim. As always, consult your attorney and accountant as I’m no tax lawyer.

Incidentally, Victor is returning to CU as an Associate Professor at the law school this June! I’m glad to welcome him back to Boulder after he spent the last few years at the University of Illinois College of Law. I’m excited that he’ll be an asset to the local entrepreneurial community once again.

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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

VCIR deadline approaching

December 9, 2008

The deadline to submit an application for your company to present at Venture Capital in the Rockies in early March is December 20th. Here’s my previous post on what they’re looking for. All that’s required to submit is a 4 page (or less) executive summary. Both seed stage companies (<$1M) and those seeking later stage venture capital (>$1M) are encouraged to submit.

Venture Capital in the Rockies has a demonstrated track record of introducing presenting companies to qualified capital sources.

  • VCIR presenting companies have raised over $4 billion in the last 10 years
  • Over 150 venture capitalists attended last year including nearly 50 from venture firms on the the west or east coasts

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

And it holds for angel investing too

November 13, 2008

Fred Wilson’s post amplifying Jeff Nolan’s post about the “broken” VC model says about venture capital investing what I was trying to say about angel investing at Ignite Boulder. Both made the point far more eloquently than I did, even though I was given five minutes. My point at Ignite was that most (the vast majority) of angel investors will never make any money by doing it. It’s hard (and takes alot of work) to be in that group of 10-20% of angel investors who do make money.

I’m in Toronto today speaking at Canada’s startup conference, Startup Empire. My presentation is called “Boulder, TechStars, and Why Venture Capital doesn’t have to matter.”   In general, I think that entrepreneurs put far too much weight on the availability of venture capital. Worse, they put too much mental energy into it.  I’ve been pitched many ideas over the last 3 or 4 years that always start with “get venture capital”. These business plans fundamentally depend upon venture capital (even prior to collecting underpants), causing many of them to never even get off the ground. The availability of venture capital cannot be your barometer.

My presentation in Toronto today argues that (based on raw data) it’s mathmatically 100 times harder to raise venture capital in Toronto than it is in tiny little Boulder, Colorado.  But my point is that whether your chances are 0.5% or 0.005%, does it really matter? Are you really going to focus your efforts there unless you have some of the things that improve your chances dramatically, such as a track record or a truly-world changing technology?

If you’re a first time entrepreneur with no big wins under your belt and no special relationships, it’s time to stop deluding yourself. Focus on your product and your customers, not venture capital.

Don’t let the down economy stop you from starting a business right now. That’s an excuse, and entreprenurship is about breaking through excuses. Sure, it’s hard to raise money from VCs (it always has been) and it’s also hard to raise money from angels (and it always has been) and it’s hard to build a business from the ground up (and it always has been).  It always will be, but you can do it.

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Angel Capital Summit is around the corner

November 8, 2008

The Angel Capital Summit is coming up in a few weeks. Here are some details from the organizers.

Angel Capital Summit
Hosted by Rockies Venture Club
Presented by EKS&H

Friday, November 21; 7:30am - 5:30 pm
Denver Marriott City Center, 1701 California St., downtown Denver

Opening Keynote Speaker
Denver Mayor John Hickenlooper

Lunch Keynote Speaker
Anita Burke

Town Hall Meeting
Angel Investing On The Edge
Colorado’s entrepreneurial response to the credit crisis, election, energy and sustainability.

40 Presentations for Colorado’s top entrepreneurial companies in 4 tracks throughout the day!

These are times of profound change in our economy, and entrepreneurship is the single sector in the business ecology poised to capture the opportunities that are being stirred up by these changes. You’ll also learn that you don’t have to do this alone.

Now, more than ever, our society needs a healthy entrepreneurial sector. Now, more than ever, you should attend the Angel Capital Summit, to work with the rest of us to make this a reality.

For information and registration, go to www.angelcapitalsummit.org.

As an incentive for your guests, we offering attendance at the Summit at Rockies Venture Club member rates. Please instruct guests to choose the standard “Guest Ticket - $159” on page 1 of the registration form. On page 2 of the registration form, have them enter the code “ACSIAP08″ in the Discount Code Field at the top of Page 2, then click the “Recalculate” button which will adjust their discounted price and ticket. Attendees registering for the Town Hall Meeting only will need to pay the $25 registration fee and should not enter the code.

The companies who are presenting are:

18 Principles, Inc,  3D at Depth, Affinity Telecom, Inc, Alaskan Hardgear, Allegro Multimedia dba Music Wizard Group, ApopLogic Pharmaceuticals, Inc., AppVenture, Atrato, Inc., Aubice LLC, AWhere Inc., BOCS, Cadeka Microcircuits, Center For Innovation, Metropolitan State College of Denver, Chata Biosystems, Inc., CTM Software Corporation, Del Norte Brewing, DEMAND1, FacetoFace Health, flaik Inc, Fluonic, Inc., Frontline Aerospace, Inc., GroGreen Inc, iVation LLC, JuJu Central, LLC, Lingoport, Inc., Magic Portrait, Munch Away, LLC., NanoPrint Technologies, Progressive Health Center, PROJECT C.U.R.E., Shrewd Foods, Inc., Spatial Networking, Tissue Genetics Inc., Toghers Inc., TruEffect, Inc., Two Moms in the Raw, VanDyne SuperTurbo, Inc, VarVee, LLC, VitruMed Inc., Web2Storage, WhiteDove Herbals, Inc., Xpressplay, LLC, and Zerista.

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