How to Generate Signals that Matter to Early Stage Investors

Photo by Chinh Le Duc on Unsplash

 

  • Build a strong team with direct and relevant reputation. To be clear, names alone don’t matter as much as the relevance of the team members to the challenge facing your business. Example: Selling SAAS to enterprise? Have someone on the team that has a track record of successfully growing revenue within a well known enterprise SAAS startup. As an investor I care who is on your team because it means A) other skilled people are also buying into what you’re doing and B) you have the skills within the team to execute on your plan. The common response here is that good people cost money. This is your first test as a CEO, and it’s one of the most important things to get right. Good people want to be challenged, and they want to win. If you can convince them of this, they will want to join your team, even at little or no pay.

 

  • Learn to articulate your ideas well, have confidence and conviction. The best ideas die on the vine if they are they are poorly communicated. How do you become better at articulating your ideas? Start talking. Get out of your head. Go to networking events and try to speak to 50 people. Listen to how they respond. Iterate on your delivery every time. Keep testing your pitch. If your grandmother doesn’t get it, it’s probably you, not her. Oh and on that note, refrain from sprinkling in jargon words like AI, or blockchain or IoT to make your idea sound cooler. These terms actually mean nothing to the person you’re speaking to and I find the people who truly understand a technology are capable of describing the problem and solution without using jargon. Jargon is actually a negative signal.

 

  • Know your market well and have a narrative on how you expect the market to evolve in 5 years time. If you can’t make the prediction, you probably are focused on the wrong thing. No one expects you to be a fortune teller but having a key insight into how the market will evolve in the 3 to 5 year future is particularly important for early stage investors. Remember early stage investors are betting on a future with almost no quantitative data to confirm it exists yet. Therefore, the key for an early stage investor is to find entrepreneurs who can anticipate how a market will evolve, and predict inflection points that could provide opportunities for markets to be captured.

 

  • Amplify the signal by using top tier accelerators or angel investors to help you spread the word to investors. Track record is one of the strongest signals that exist for early stage investors. If you’ve got a great track record of building and exiting companies, you already exude positive signals, but if this is your first or second company, then getting into an accelerator with a great track record can be almost as powerful. Techstars is one of just a few global accelerators that have invested in more than 2000 startups, and quite a few successful investments have come out of the Techstars portfolio. In fact more than 1 in 20 series A investments in US startups have Techstars on the cap-table. Investors trust the Techstars process to find and grow successful businesses. As an early stage startup, not only can an accelerator like Techstars help you focus on the right things, they can also amplify the positive signals you’re already generating to make sure the best investors in the world are paying attention.

This piece originally appeared on Medium

***

Want more entrepreneurship education? Check out the Techstars Entrepreneur’s Toolkit.








Startup Funding Mechanics: Incorporation, Convertible Debt & Series A

What do first time founders need to know about fundraising mechanics? This post should help you understand the basic lingo of fundraising – so you don’t look surprised or sound like a noob when you’re discussing funding. An attorney will go into a lot more detail and it’s important that you understand investor motivations – not all capital is green.

Please keep in mind, this is a founder’s view, I am not a lawyer – this isn’t legal advice. There are always exceptions to every rule. Especially in legal where optionality creates billable hours. Ask about costs with lawyers in advance.

Starting at Incorporation

Let’s start with incorporation. Who owns what percentage and what is a common number of Issued and Granted share and how do Stock Options play into the equation.

When you incorporate, you will Authorize (Authorized) Shares and Issue (Issued) Shares. Authorized is the total number of shares the company many issue over the lifespan of the company without changing its Charter with the State (incorporating entity). Typically this is a large number of shares so you don’t have to go back to your state or government agency to issue additional shares at a later date. Your corporate Bylaws and Charter will dictate how you can access these additional shares.

Issued shares include the number of shares for founders at the time of incorporation, the Stock Option Pool – usually 10-20 percent depending on if early employees get a grant or an option. As well as preferred shares that you anticipate selling in the early rounds of funding.

For example, if you wanted to increase your stock option pool, it would require documentation and a vote of the Board and perhaps shareholders. There are two types of shares at formation:

  • Common – the most basic of the shares
    • These shares are granted to founders and early employees at the time of incorporation or held in reserve
    • The 6,000,000 shares, in this example, would be divided between the founders – see Awkward Co-Founder discussions for more on that topic
  • Preferred – as implied, these shares will have a preference of some kind – but the preferences will be determined later. The preferences will change with each Series – or round of funding and generally grow in complexity with preferences, see below
    • These are the type of shares sold to investors
    • The specific preferences can change with each round of funding

When you incorporate your company the value or basis of the stock is (hopefully) the least it will ever be. At that point in time, you are granting Issued shares to the founders. This grant is in exchange for an Assignment Agreement and anticipated work to be contributed to the organization.

This is usually calculated in the fractions of pennies – so 3,100,000 shares may reflect a cash contribution of $3,100. This is likely the cash you and your partner(s) will be contributing to pay the legal fees or other costs associated with the early project work. This creates a basis for your stock price – when you sell it later, it reflects the cost you have in the stock. Think:

Total Sale – Basis = Taxable Income

Your Attorney Represents the Company

Not the founder. If you want someone to represent you and your founder team, you’ll need to pay them outside of the company funds.

The attorney also doesn’t represent the investor – but they may try to cozy up to them. In one of my startups we had a big name investor (I won’t name drop here) and our attorney decided that he might get more business by helping out the investor. This is not “good form” and professionals should know better. We ended up letting that attorney go and finding another one in the process.

Board Members also represent the interest of all shareholders – it’s called fiduciary duty. They will be required to vote their shares – especially if you have a class of shares to vote. However, they need to represent the best interest of the business. More on this topic in another post.

You’re now incorporated, you’ve established your basis for the stock. In the US you’ll need to file an 83B election.

Stock Options

Stock Options – are the shares held by the early team members or contractors. These are typically Incentive Stock Options (ISO) or Non Qualified Stock Options (NSO). ISO’s have favorable tax treatment of Capital Gains vs Regular Income (more in Joe Wallin’s blog). They are shares granted at the time of employment or generally the next Board meeting.

  • Strike Price – this is the price the shares are granted at the time, at incorporation, it’s likely $0.01 per share. As a later option it will be closer to the fair market value – for more details see Fair Market Value of a Startup. Keep in mind they can’t be granted at a cheaper rate than Fair Market Value without creating a taxable event. The price is the same price for everyone you grant options at that time.
  • Vesting Schedule – is the term in years that the shares will vest. Usually three or four years, it can be monthly or quarterly. Let’s use the example of a four year schedule with a one year cliff. Cliff Vesting – usually the first 12 months is the initial vesting schedule.
    • 60,000 Share Grant example
    • Strike Price of $0.10 a share
    • 365 Days =  15,000 shares vested
    • 45,000/36 remaining months = 1,250 shares vested per month
  • Reverse Vesting Schedule – for a founder, when you are granted shares at incorporation you own the shares, however, you may be asked to reverse vest those shares. The reason is simple, let’s say you own 35 percent of the company and you decide at month 13 that you want to go do something else with your life – things happen. If it was similar terms as above

 Original Shares

 3,100,000

25% for year 1

 775,000

 2,325,000

2.7778% (or 1/36)

 64,583.33

 2,260,416

 Total Founder Shares at Exit

 839,583

This leaves 2.26M shares available for the company to use to hire your replacement or replacements over time. Think of this as a “must be present to win” tax. Remember, as much as you might think you are “owed” these shares as a founder, the market recognizes you have to keep contributing as an employee to keep the stock.

Convertible Debt

A convertible debt is a debt instrument used to put money into a company without having to put a price on the value of the company and the corresponding value of the shares. This funding mechanic is good for startups in a number of ways. First, you think your idea is more valuable than it really is, all of us do, so you don’t have to price the stock lower than you would like.

Second, the legal costs associated with this type of financing should be the cheapest option for your startup.

  • Convertible Debt
    • Amount – of the individual and as a total
    • Term – accrued interest over what timeline
    • Rate – usually in the 6-8 percent range 
    • Conversion at Qualified Financing – this stipulates reason for converting and the minimum amount to be raised – this would include accrued interest from the early investors
    • Cap – a cap is the reason a investor is interested in this financing mechanic. In the case of Techstars, it converts at either the lessor amount of the financing or the “Cap”. For example, the cap may be $4M. If you raise a $1M at $5M pre-money, the original investors are effectively in the money from their original investment – though they can’t sell the stock at this point.

Debt is “first in line” to get paid if the company was to fail and you have to sell the assets (assuming there was value). What that means is that if you have IP that you can sell for $100k and you have $1M in convertible debt holders they would get a pro-rata % of that sale before shareholders – like founders – would get paid anything.

Keep in mind, these early investors are taking the most risk at this stage of your company and most don’t want to simply get paid back their principal and interest. They are looking to actually own the stock.

Selling Stock – Preferred Shares

Preferred Stock sales is a priced round of capital to be sold. Generally it “stands in front” of common stock until a company goes public, at that time all of the stock generally is the same – all common. Their are exceptions, like the Killer B stock, but in general an IPO converts all stock to common. The size of each of these Series depends on your location, e.g. the Valley has bigger funding rounds than Iowa City.

Keep in mind, when you sell new shares of stock in the company you are not selling your shares, you are taking shares from the Issued Preferred Shares. This will cause overall dilution to all shareholders, but the cash will go to the company and not to the founder.

  • Series Seed – Series Seed documents are an open sourced set of documents designed to be both company and investor friendly. The goal of Series Seed is designed as a template your lawyer can use to keep the documents cheap – you don’t want $30k to go to the lawyers for a $250k round of funding.
  • Series A – the terms of a Series A round of funding is set by the lead investor. It’s a negotiation, but you’re not completely in control of the process unless you are killing it on your forecast to actuals numbers and have multiple investors that want to lead the round. Having competitors always matters in getting the best Term Sheet.
  • Participating Preferred Shares – this means that they investor will get their money back and then participate like the common shareholder.
  • Series A Extension – extending the previous round and fundamentally the same terms.
  • Series B – simply comes after the series A, can include a range of different terms

A Few Other Provisions

Here are a few other legal terms you’ll see on term sheets

  • Pro-rata participation – this is a provision that allows the investor to keep their pro-rate percentage in future rounds. If they invested and have a 5% share, they have the right to keep that 5% share if they continue to invest in the up rounds
  • Down Rounds – Cram Down Rounds – if you missed your numbers and are running out of cash, but your investors believe in what you are doing you may be faced with either a down round or a cram down round.
    • Down round is simply a pre-money price that is lower than the post money price of your last round – your company has effectively gone down in value
    • Cram Down is where an investor forces other investors to participate or effectively crams down their percentage of ownership.
  • Drag Along/Tag Along  is a provision that allows and protects majority shareholders to pull along a minority shareholder, specifically at the time of a sale.

Questions about fundraising? Use the comment function below.

This was originally published here








Techstars Venture Capital Fund Invests in Impact Health Series A Round

Techstars Venture Capital Fund invests in innovative and disruptive Techstars companies to fuel their success. We are excited to announce that, along with Foundry Group, we are investing in Impact Health’s $13 million Series A round.

Founder and CEO Christine Carrillo, along with her cofounder Helen Lee, have built an impressive team at Impact Health (Techstars Class 62, led by Alex Iskold in NYC) centered around the mission that no matter your background, what your politics are, or where you’re from that you deserve health and healthcare that serves you. Despite the incredibly divisive times we live in, they believe that people can come together to fix our healthcare system and solve the very real health needs. Our investment in Impact Health aligns with Techstars’ history of investing in healthcare technology.

After receiving feedback from over 100,000 consumers about their experiences buying and using health insurance, Impact Health has used those insights to make the process simple and transparent. Impact Health has built a sophisticated online platform to take the confusion out of buying and using health insurance.

The service is resonating – Impact Health has grown its subscriber base by over 20x in the last year. Driven by an obsessive customer focus and strong data background, Impact Health has provided tens of thousands of individuals with a seamless way to find the best health plan that suits both their needs and their budget.

We are thrilled to be investors and backers of this important mission and are eager to support Christine and Helen in shaping the future of health insurance!








Funding and M&A Across the Techstars Worldwide Network

The last few months have brought several notable funding announcements and M&A activity for many Techstars alumni.

Congratulations to:

This brings us to a total of 121 Techstars companies acquired, and $3.5B raised by our accelerator companies.

In addition, here are the companies that have recently received significant investments!  

DataRobot (Techstars Class 21), raised another $54M in March to automate data science tasks. DataRobot transforms businesses with automated machine learning.

Placester (Techstars Class 9), raised $50M to expand real estate software tools. Placester is a digital marketing platform for real estate professionals.

Sphero (Techstars Class 6), the Boulder-based company that created the BB-8 toy robot, recently raised another $35.4M in early April.

Outreach (Techstars Class 12), raised $30M in late May. Outreach provides Sales and Marketing teams with the capabilities to drive deeper engagement with prospects.

Synack (Techstars Class 22), announced a $21M raise in early April. Synack is a security startup that combines software security tools with a network of white-hat hackers to help keep its customers secure

Filament (Techstars Class 45), a provider of wireless industrial networks, raised $15M in late March.

Tenfold (Techstars Class 47), the Austin-based startup that integrates customer relationship management systems with company phone systems and other communications tools, recently raised $15M.

Latch (Techstars Class 45), raised $10M in early May. Latch created internet-connected smart locks for the enterprise market.

Kalo (Techstars Class 46), formerly Lystable, raised $10M in March. Kalo allows companies to manage freelancers, track their work and pay them on time.

Freight Farms (Techstars Class 22), the company that builds automated farm systems in shipping containers, raised $5.6M in a new round.

Bitfusion (Techstars Class 47), an AI lifecycle management platform, raised $5M in a Series A round to strengthen their R&D efforts.

Chowbotics (Techstars Class 66), the company that created Sally, the salad-making robot, raised $5M in early March.

Amper (Techstars Class 96), raised $4M in March. Amper is a startup that offers AI-powered music composition.

Morty (Techstars Class 77), the first ever fully digital mortgage broker, raised $3M to make its mortgage marketplace available to users.

Remesh (Techstars Class 60), a software platform that uses AI, machine learning and natural language processing for market research, raised $2.25 million in seed funding.

RateGravity (Techstars Class 95), raised $2M in early May. RateGravity provides an automated service for matching homebuyers with low-interest mortgages.

MeetMindful (Techstars Class 68), raised $1.8M in April. MeetMindful is a relationship platform that connects a large, growing number of people pursuing a healthy, mindful lifestyle

Fam (Techstars Class 53), a video-chat app from the company Smack, raised $1.8M in mid March.

Stackery (Techstars Class 92), provides a production-grade, operational toolset for developers building serverless applications. Stackery raised $1.75M in April.

IronCore Labs (Techstars Class 91), the company that provides turnkey encryption customer controlled data for SaaS companies, recently raised $1.5M.

Sea Machines Robotics (Techstars Class 95), the company that provides autonomous self-driving systems for boats, raised $1.5M in May.

Polis (Techstars Class 67), raised $1.3M in March. Polis provides easy and scalable door-to-door outreach software for campaigns and corporations.

Apostrophe  (Techstars Class 91), is an innovative health plan that saves self-insured employers up to 40 percent on their healthcare costs. Apostrophe recently raised $1.15M.

Patch Homes (Techstars Class 81), provides home equity financing at 0 percent interest and no monthly payments. Patch Homes raised $1M in seed funding in April.

Prospectify (Techstars Class 88), raised $1M in March. Prospectify offers account-based intelligence that’s automated but personalized.








Funding and M&A Across the Techstars Ecosystem

It has been an exciting start to 2017 with several notable funding announcements and M&A activity for many Techstars alumni.

Congratulations to:

In addition, here are the companies that have recently received significant investments!  

SalesLoft (Boulder ‘12), a sales engagement software company, announced a $15M Series B round at the end of January to continue to deliver new features and innovation. SalesLoft is based in Atlanta.

Neurala (Boston ‘13), recently raised $14M to build brains for drones and more. The Neurala Brain is a deep learning neural network software that mimics how the human brain works.

Zagster (Boston ‘12), the company that provides bike share programs for cities, universities, businesses and properties recently announced a $10M Series B round. Zagster is based in Cambridge, MA.

Filament (R/GA ‘15), a complete hardware and software ecosystem for building the Internet of Things, raised $9.5M in late February. Filament is based in Reno, NV.

INSPECTORIO (Retail ‘15), uses data and machine learning to improve quality control and bring transparency to supply chains. They announced a $3.7M seed round in early January. INSPECTORIO is based in Minneapolis.

Jiobit (Chicago ‘16), the company that created a wearable to give you peace of mind when it comes to your kid’s location, raised $3M in seed funding to continue to keep kids safe.

AdmitHub (Boston ‘15), announced $2.95M in seed funding to continue to guide students through school. AdmitHub provides virtual college counseling to students and helps colleges connect with prospects.

Hull (Boulder ‘13), the company solving customer data fragmentation, raised $2.6M in late January to become the central hub for all customer data. Hull is based in Atlanta.

Keymetrics (NYC ‘15), raised $2M in early February. Keymetrics is a real-time platform for managing and monitoring NodeJS applications.

Cuvva (Barclays London ‘16), announced £1.5M (~$1.86M) in new funding this past January. Cuvva offers flexible, on-demand car insurance by the hour. Cuvva is based in London.

Sequr (Atlanta ‘16), a SaaS solution for residential and enterprise physical access control, raised $1.75M in their second seed round in mid-January.

Apptentive (Seattle ‘12), a mobile customer engagement software that helps companies listen, engage and retain customers just announced another $1.7M round to continue to grow.

PartySlate (Chicago ‘16), announced a $1.6M raise in late February. PartySlate is an online platform to connect event providers with people looking to host an event.

PenPal Schools (Austin ‘15), raised $1.25M to connect students around the world. PenPal Schools connects classrooms around the world through online exchanges.

Bamba (Austin ‘16), raised $1.1M in mid-February. Bamba helps market research firms and development aid organizations open communication channels to engage mobile subscribers that generally would be considered inaccessible. Bamba is based in Nairobi.

Over the last decade, Techstars has grown a worldwide network with 100 exits, 1000 companies in the portfolio and 10,000 jobs created by those companies. Want to be a part of it? Learn how and apply today!








Funding and M&A Activity Across the Techstars Ecosystem

As we near the end of 2016, many Techstars’ alumni are celebrating exciting funding news from the past few months.

Congratulations to:

We are now well over 100 Techstars accelerator companies that have been acquired. Those gold shirts are really adding up!

In addition, here are the companies that have recently received significant investments.

sendgrid

SendGrid (Boulder ‘09), a leading delivery platform for customer communication that drives engagement and growth, recently raised $33M in Series D funding.

leanplum

Leanplum (Seattle ‘12), a complete mobile marketing platform, announced a $29M Series C round in mid-October.

zipline

Zipline (Seattle ‘11), recently raised $25M in Series B funding. Zipline builds drones and delivers crucial medical supplies to remote locations that are not accessible by land.

lqivy6oo

Amino Apps (Boston ’14), announced a raise of $19M in Series B this December. Amino Apps is a mobile only platform for passionate niche communities.

owlet

Owlet (R/GA ‘13), the creator of the Owlet Smart Sock, a baby monitor that allows parents to better understand their child’s health needs, recently raised $15M to continue product development and clinical studies.

ovia

Ovia (Boston ‘12), recently announced a $10M raise to become the leading provider of women’s health apps. Ovia (formerly Ovuline) is a fertility monitoring tool for women who want to maximize their chance to get pregnant.

irisvr

IrisVR (NYC ‘15), the company that allows architects and designers to turn their 3D plans and blueprints into virtual reality experiences, raised $8M in Series A funding in late October.

lovepop

Lovepop (Boston ‘15), raised a $6M Series A in late November. Lovepop creates laser-cut 3D paper designs inside a seemingly normal greeting card.

stasislabs

Stasis Labs (Healthcare ‘16), the company that built a health monitoring system that allows doctors to catch declining patients and intervene before a critical event, raised $5M in seed funding in mid-November.

apptentive

Apptentive (Seattle ’12), a Seattle-based mobile customer engagement software company, recently raised $3.6M round to help hire new employees.

ravelin

Ravelin (Barclays London ‘15), raised £3M (~$3.6M) in Series A funding this past October. Ravelin provides fraud detection for the on-demand economy.

spoileralert

Spoiler Alert (Boston ‘16), the Boston-based startup focused on eliminating food waste recently raised $2.5M. Spoiler Alert offers an online platform that enables food businesses to manage surplus and organic waste.

hqheyrdj

Spatial (Mobility ‘16), a location api that uses artificial intelligence to answer questions only a local would know, recently raised $2M.

garmentory

Garmentory (Seattle ‘14), a boutique fashion e-commerce platform, raised $2M in late November to take on larger retailers. Garmentory hosts an online marketplace that connects boutiques and designers with customers.

stylesage

StyleSage (Austin ‘15), recently raised $2M in seed funding to help amplify sales and expand into other markets. StyleSage helps fashion brands and retailers maximize sales and and optimize merchandising and planning using data-driven insights.

kty1nm6g

Maxwell Financial (Boulder ’16), the company that is reinventing how the $8.5T residential mortgage industry works, raised $1.95M in funding to continue to recruit top engineering talent in Denver.

logicgate

LogicGate (Chicago ‘16), empowers businesses to transform disorganized risk and compliance processes into enterprise-grade applications without writing a single line of code. They recently raised a $1.9M seed round.

yfd6o1vn

Codementor (Seattle ‘13), an on-demand marketplace for software developers, recently announced a $1.6M raise. Codementor connects you with experienced mentors for instant coding help via screen sharing, video and text chat.

blueprint

Blueprint Registry (Retail ‘16), announced a $1M seed round this past November. Blueprint Registry is an innovative life-event registry platform where you can shop or register for products based on your home’s blueprint.

remesh

Remesh (Barclays NYC, ‘15), an enterprise platform that uses artificial intelligence to turn collective wisdom into intuitive, decision-making data in real time. Remesh raised $1M in early November to continue to expand.

Don’t miss your chance to join a Techstars accelerator program – Apply today.








Funding and M&A Activity Across the Techstars Ecosystem

Third quarter brought some exciting funding news for Techstars companies!

Congratulations to:

Here are the companies that have recently received significant investments!  

remitly

Remitly (Seattle ‘11), a mobile payments service that enables convenient international money transfers from a customer’s mobile phone in the USA to a mobile phone abroad, secured yet another $38.5M.

pillpack

PillPack (Boston ‘13), an online pharmacy that delivers better care through simple packaging, modern technology and personalized service, raised $31.1M to take on pharmacies.

fullcontact

FullContact (Boulder ‘11), the company that provides a cloud-based contact management solution for businesses, developers and individuals, raised $25M in August.

distilnetworks

Distil Networks (Cloud ‘12), announced a $21M series C. Distil Networks is the global leader in Bot detection and mitigation, offering the first SaaS solution focused on stopping automated attacks.

gospotcheck

GoSpotCheck (Boulder ‘11), the company that supplies brands with real-time insights into their in-store merchandising through a mobile app, raised $16.5M to expand their Denver HQ.

postquantum

Post-Quantum (Barclays UK ‘15), raised a $10.3M series A round in July. Post-Quantum deals with cyber security for today and the post quantum computing future.

promoboxx

Promoboxx (Boston ‘11), is a brand-to-retailer marketing platform that allows brands to launch co-branded, customized online campaigns with their retailers. Promoboxx raised $8.2M series A in September.

codeship

Codeship (Boston ‘13), raised $7M to continue to accelerate their business to reach even larger customers. Codeship helps teams ship better software faster by automating the release process.

truefacet

TrueFacet (Seattle ‘14), is the online jewelry marketplace where you can shop and sell branded jewelry and watches with confidence. They recently announced a $6M series A.

livelike

LiveLike (NYC ‘15), the company that developed a sports viewing platform that leverages VR to bring live stadium experiences to fans’ living rooms, recently raised $5M.

kepler

Kepler (Seattle ‘16), recently raised a $5M seed round to develop and operate a network of 50 nanosatellites to allow customer spacecraft to communicate with each other and the ground in real-time, regardless of their current orbital position.

bitfinder

Bitfinder (R/GA ‘15), the company that built Awair, a device that monitors indoor air quality, analyzes it and provides solutions based on users’ wellness needs like allergy, sleep and productivity, recently raised $4.5M.

livestories

LiveStories (Seattle ‘14), announced a $3M seed round. LiveStories empowers non-technical people with a simple data discovery and presentation tool that allows easy construction of data-rich content, all without writing a single line of code.

bison

Bison (Boston ‘12), a financial technology company delivering software for analyzing private fund data, recently raised a $3M seed round.

screen-shot-2016-10-11-at-3-59-03-pm

Reflect (Seattle ‘16), a data visualization service that is reinventing how companies build and distribute analytics, recently raised a $2.5M seed round.

aire

Aire (Barclays UK ‘14), is a fresh approach to credit scoring for consumers, enabling fair access for those cut out of the credit ecosystem. Aire secured $2M in funding in October.

shyft

Shyft (Seattle ‘16), raised $1.5M in July. Shyft is an app that makes lives easier for retail and service workers around the world, by helping them communicate and manage their work life in one central place.

Don’t miss your chance to join a Techstars accelerator program – Applications close October 15. Apply today.








Kicking The Can: Valuations and Planning for the Future

When it comes to investment structures, I hope that my 30+ years as an entrepreneur and VC has led to some wisdom about what works and what doesn’t, because it certainly has led me to have strong opinions on the topic. People like to say that VCs are in the pattern recognition business. If that’s true, then today I’m seeing a troubling pattern developing around company valuations aided and abetted by the overuse of debt.

Convertible debt, SAFEs and venture debt all have their place, but increasingly, these structures are being used specifically to avoid setting a price for equity. And if there is no price, there is no all-important “meeting of the minds” between seller and buyer when the money changes hands. Yes, these vehicles make “today” easier, cheaper or more expedient – at the expense of “tomorrow.”

In other words, they kick the can down the road…

To be fair, over the years I’ve kicked more than a six-pack worth of convertibles down Lake Shore Drive, if you catch my drift. Do I feel good about it? No, but, part of the reason its good to have an experienced operator as a VC is to avoid foreseeable mistakes. At this stage of my life, experience has taught me to align interests early.  I know that when investors and entrepreneurs are aligned, both maximize returns.

Valuations

Valuations are high relative to business fundamentals. What does this mean? Lots of things, but mostly it means that performance expectations are high too.

The big mistake I see many entrepreneurs make is to try to optimize the current transaction at the expense of the future. Look, everyone wants to maximize deal terms, but, fundraising is not a one-time event. You will be back at it for your next round sooner than you think.

The best entrepreneurs are the ones that treat fundraising like a game of chess, where each move sets up the subsequent moves for success. You should always be thinking one or two moves (funding events) ahead!

There are two things that will make your next move easier.  First, do NOT over promise now…When you go back to your existing investors and ask them to participate in the next round, the biggest indicator of their response is how the company has performed compared to the expectations that you set in the last round. Imagine two scenarios:

1)    You raised your last round on projections to get to $20 million in ARR but are coming in at $16 million.

2)    You raised your last round on projections to get to $10 million in ARR but are coming in at $14 million.

Even though the first scenario has more revenue, I promise you it would be easier to raise money on the second scenario as you are exceeding investor expectations.

The lesson here is sales 101 – promise just enough to get the deal done and no more. Or, said another way “under promise and over deliver.”

The second thing that will make your next round easier is if you have a reasonable “hurdle” to clear. The “hurdle” being the post-money valuation of your last round. Everyone likes to invest in companies that are growing fast with valuations that are escalating, very few like to participate in down rounds.

So, even if you get what appears to be an attractive valuation for your first round, think about the capital that you have, the progress it will buy you and your confidence that you can raise the next round to have a pre-money valuation that is higher than this round’s post-money valuation.

If you are not dead confident of this, then this valuation may be too high and may hurt you in the long run. And remember, we are all optimists – we have to be, to be entrepreneurs or VC’s. That means that the strong odds are that results will not be quite as good as or it will take longer than you think. Leave yourself some buffer!

Think it through. Play it out in your head. Ask other entrepreneurs who have lived through it. When you are raising, you should be optimizing for finding the right long term partners who can help you grow your business and worry less about maximizing price.

Valuation does matter. But a higher, unjustified valuation can also hurt you down the road.

Convertible Notes vs. Priced Rounds

Certainly for early rounds, convertible notes and SAFEs are becoming more popular than traditional priced rounds. I get it. Entrepreneurs talk about how notes are easier and cheaper to execute. But what I don’t hear them admit is the real reason many of them prefer notes – they want to avoid the valuation discussion. They would rather deal with that later. But as with most difficult discussions, the sooner you deal with it, the better the outcome.

Here is what really happens with a note. Let’s say that the entrepreneur and the investor agree to a valuation cap of $5 million, with a discount. Here is what is going on in their heads:

Entrepreneur: “I just got a valuation of $5 million for my business this is awesome!”

Investor: “I will live with the $5 million cap, because I think the next round may be below that and I will get my 20% discount so I will be protected.”

You are NOT ALIGNED!

An analogy would be if you sold your product with a price range instead of a price. You tell the buyer it costs “$80 – $100.” The seller only thinks about the $100 side of the deal while the buyer only thinks about the $80 price.

You are not aligned and will have more trouble closing that deal than if you agreed to a single price in the first place.

Sounds crazy to quote a price for your product as a range instead of a single discrete price, why would you ever consider having a range of price for your company!

To be fair, there is a time and a place for convertible or bridge notes. Let’s say you have a big sales contract or distribution agreement that will be signed in the next quarter – or a brand new product release that will change the company and you need a little capital to get you there, then a bridge note makes sense because you have a bridge to somewhere.

Venture Debt

I love debt. What a fantastic tool and great leverage to help you operate your business – once your business is stable and you have predictable and consistent cash flows. Just like with higher valuations or Convertible Notes, at MATH we are starting to see a troubling trend of companies earlier in the life-cycle, taking on Venture Debt.

The truth is debt can be a fantastic tool. It can also be the death of many companies.

All debt comes with covenants. What happens when you breach your covenants? There are both micro as well as macro trends that can affect your business – some within your control, many outside of your ability to affect change.  What happens if you miss your quarter? If there is a sales slow down? A delay in shipping your next product? Or, what happens if 2008 happens all over again, and outside of your control the markets take a dive? We’ve seen perfectly rational lenders, make totally irrational decisions in turbulent markets.

We get it; sometimes Venture Debt might seem like a great, or the only, alternative. But, you are truly putting your business in the hands of lenders who might not always make, or have the ability to make, the most appropriate decisions about your business given stressful times. I’ve lived through 2000 and then again 2008/2009 and saw many good businesses shut down or forced to liquidate/sell by banks.

So let me be clear – I love venture debt – when the company already has proven the product-market fit and there is consistency and predictability to revenues. Otherwise – tread thoughtfully and carefully my friends.

Optimizing for the Long-term – Beware the Easier Solution!

Most of us think and optimize for the short-term. Makes sense, when you are a start-up entrepreneur. A higher valuation on the surface seems to make sense (who wouldn’t want a higher valuation); or a Convertible Note is easier and cheaper today; or Venture Debt seems less dilutive (or maybe is perceived to be the only alternative). All true – but beware!

Each one of these can have much more troubling longer-term consequences. Many times the easier or more obvious path is not the right one. Unless your company is one of the very rare rocket ships, then more often than not, it is actually the harder path that is the right one to take.

Don’t kick the can down the road. As hard as it may seem in the moment, it’s always better to optimize for the longer-term and not just in the moment.

 

This post was originally published on MATH Venture Partners’ blog

Get a head start on your own entrepreneurial journey. Apply to an accelerator program. Applications close on October 15th.








Funding and M&A Activity Across the Techstars Ecosystem

The past three months have seen some exciting funding news for Techstars companies! Congratulations to:

Also, a big shout out to the Techstars Ventures-backed Twilio on its IPO in June!

Here are the companies that have recently received investments!  

 

fiVeFs-p

Remitly (Seattle ‘11), a mobile payments service that enables consumers to make person-to-person international money transfers from the U.S. and Canada, secured $38.5M in Series C funding last April.

lNvdwdYd

Cloudability (Cloud ‘12), a data-driven cloud cost management firm, raised $24M in a Series B funding round earlier this month to continue to scale.

dC3PuuzC

Outreach (Seattle ‘11), recently raised $17.5M in Series B to expand their engineering team. Outreach builds robust communication software for Sales Development Reps, Account Executives and Success Managers.

Bench-logo-small

Bench (NYC ‘12), a modern, online bookkeeping service for independent businesses, announced a $16M ($20M CDN) Series B round that will go toward product enhancements.

6B9MK8yO

Keen.io (Cloud ‘12), is a custom analytics backend for modern developers. Keen.io secured $14.7M in Series B financing to accelerate their global growth in the enterprise.

HVkc-p2o

Lystable (London ‘14), recently closed an $11M Series A round. Lystable is the platform for the lean enterprise, helping large organizations manage their suppliers and external resources.

5M36s2eZ

Ionic (Cloud ‘13), is a powerful open source UI library and toolchain built with open web technologies that enables web developers to build high quality mobile apps on multiple platforms with one single code base. Ionic announced an $8.5M Series A funding round in late April.

-j65kuAg

Testlio (Austin ‘13), a full-service mobile app testing solution, received $6.25M in Series A funding in mid April to continue to grow and evolve as a company.

Xpd0DERX

Convey (Austin ‘14), is the first concierge solution focused exclusively on customer delivery. Convey recently announced that they raised $4.5M in Series A funding to invest in their engineering work.

ym_of5aP

Notion (Boulder ‘14), raised $3.2M in additional funding early this month. Notion is a wireless home monitoring system that can detect things like when doors open, your home’s temperature and even if there is a water leak.

soI6Oaai

Homemade (NYC ‘15), raised $2.1M in seed funding in early April. Homemade is a platform for cooks to share their meals and story with the community.

dDW48Tp-

Netra (Boston ‘15), raised $1.85M in early June. Netra is focused on helping enterprises regain control over the chaos of imagery to better understand consumers’ intent and preference – and help them find exactly what they’re looking for.

QYfT3h1Z

ilos (Cloud ‘16), the company that allows businesses to communicate with customers and team members by instantly recording and sharing videos, raised $1.5M in its first formal round of financing.

Q-l4-5CP

Preply (Berlin ‘15), is an online platform for finding private tutors in your city or by skype for a variety of subjects. They recently announced a $1.3M seed round in early June.

3IovP-P9

Flip (NYC ‘15), recently raised $1.2M in seed funding. Flip simplifies the experience of renting housing by turning leases into liquid assets that people can buy and sell from one another.

 








Why Your Startup Should Eat A Debt Sandwich

I’ve given this talk at various Techstars programs quite a few times now, and most recently gave it in L.A. at our awesome Healthcare Accelerator in partnership with Cedars-Sinai. I always do this talk off-the-cuff (no slides) to keep it interactive. You won’t find my talk online anywhere, so I’m excited to share some of the key points for the first time here.

Founders are often given valid but over-simplified advice when it comes to debt financing. Some of the “mostly true” points include; debt rounds cost less from a legal standpoint, that you can negotiate a high conversion cap (implicit next round valuation target) than are priced equity rounds, and you can raise money progressively (one investor at a time).

All of this is often true. Debt rounds can be easier and can also keep costs down for all parties involved. That’s why I’ve often heard it said: “If you don’t know what to do just raise debt”, or “if you don’t want to price your company, just raise debt.” Venture Deals does a great job of discussing these dynamics in more detail.

Don’t get me wrong, I’m not here to say debt rounds are bad news. At all. All I’m saying is avoid raising two (or more!) debt rounds in a row.

Instead, sandwich debt between equity so the debt won’t come back to haunt your company later.

Why Sandwich Your Debt?

Your cap table can end up like a sandwich with too many condiments stacked on top of each other. We all know what happens, and only about ½ the sandwich ends up in your mouth!

Debt rounds become problematic because each round of debt comes with its own discount, it’s own conversion cap, and other rights/terms. It becomes particularly complex if one of the rounds has a low conversion cap and the next has a higher one. The cap table math gets complicated, the founder/common dilution gets significant, and the new money investors end up with less ownership than they are looking for.

All of this has to be sorted out by legal or the VCs, messaged to the existing investors, and managed by the lawyers in papering the round. This causes problems for everyone, and some investors will just walk because the deal becomes complicated.

The early investor sometimes get asked move the cap up, and no one feels good about that move. I often remind founders that $1.00 isn’t actually $1.00 with debt, it’s either a $1.25 (remember the 20% discount & interest) or more like $1.50+ if your next round is well above the cap.

It’s good to go in eyes open and to realize that stacking debt means the discounts, the interest, and the cap all end up driving up the actual dollar leverage to the investor and the company sells more equity in the round but gets no additional net-new capital to spend from it.

When you sandwich your debt between equity rounds you are mitigating the risk of the next equity round toppling over due to complexity or having to do a massive amount of negotiating with both old and new investors and having the dilution get out of control.

Real World Example

One company I worked with had 3 different note rounds with escalating caps and discounts (1M/50%, 2M/20%, 3M/20%). The 1M cap round was the 1st money in and what a deal that was (for the investor)!

The timeframe across all of the 3 notes was ‘too short’; The 1M note was only 6 months from 3M — new investors felt the cap/discounts on the early notes were a ‘deal that never should have been done’ and there was friction from the get-go. Naturally the founders didn’t want to sell any more debt at that 1M/50% level.

Without a restructure of the early debt, it would have amounted to an approximate 5% additional dilution to founders when the priced round closed.

The early note holders were friends and family, but despite that, getting them to agree to changing the debt terms was very challenging. Who wants to give up the better deal they got for taking the early risk?

New investors have a range (ownership model) that keeps founder/early investor/new investor ratios balanced — the successive debt rounds painted the company into a corner where it was almost an impossible equation to solve for. It became messy — and almost killed the deal.

The Solution

The company ended up renegotiating the 1M cap notes to 2M. This cost the CEO 80 hours of time, the co-founder another 60 hours, and a substantial legal bill. Let that sink in for a moment. The founders lost a good month of productivity on this.

Had they raised the 2nd/3rd round of notes as a priced round, the first round of notes would have been converted in early. The 1M note investors would have gotten a quick 2x on their investment and then owned equity. None of this process and extra dilution would have taken place. The company would have raised that seed round with a pre-money around the same valuation as the later note caps, so they would have also saved the 20% discount.

Avoid this kind of headache, and just eat a debt sandwich instead.