Sep 252013
 September 25, 2013  Posted by at 8:49 pm No Responses »

Today’s Lunch-N-Learn at ATDC was John Yates giving his Top 10 Points for Raising Money From VCs:  How To Do It Right From a Seasoned Veteran

John is one of the most experienced startup lawyers in Atlanta and he shared his views on what VCs were looking for in Series A rounds.  He based the presentation on the 10 ‘Investor Scorecard’ criteria he uses with his clients to assess their readiness to raise funds.

Here’s a summary of John’s tips:

1.  Market Size

Select a large and growing market and master it – conduct your market research on competitors, market size and customer profile.

 2.  Protectable Product / Service

Build a protectable product/service – articulate bariers to entry and remember patent protection under the America Invents Act.

3.  Management Experience

Locate a seasoned entrepreneurial friend – and make him/her a member of your management team, investor or Advisory Board

4.  Investor Quality

Find a small group of impactful angel investors to support the initial funding – avoid large numbers.

 5.  Cap Table

Don’t mess up the cap table – avoid investor terms or valuations that may preclude future financings

 6.  Ability to Pivot

Be prepared to pivot/morph the company’s business model – and display a willingness to do so, if needed

 7.  VC Targets

Carefully select VC targets and learn as much as you can about them and their key metrics before meeting – note the differences in funds in Silicon Valley, Boston, NYC, Atlanta/SE

 8.  Financial Experience

Master the financial numbers – and practice answering the tough financial questions

 9.  Sales Forecast

Prepare a believable sales forecast and be able to defend it

10. Presentation Style

Practice your investor presentation with colleagues, advisors and friendly VCs in advance

Sep 242013
 September 24, 2013  Posted by at 9:16 pm No Responses »

I had a discussion with an entrepreneur today that was facing a challenge.  A potential customer was asking for his startup’s financials as part of their due-diligence.  It’s a conversation I’ve had many times with ATDC companies.

Potential customers or distribution partners sometimes ask startups selling mission critical and enterprise applications for their financials.  The fear for early stage startups is their financials will kill the deal – either by exposing a lack of customers (size), or exposing the financial instability of a startup (weak balance sheet and losses).

There are a few ways of dealing with the request.  But before diving into those, one of the keys to success in those early deals is being relatively transparent that you are an early stage company and emphasizing the benefits of being an early customer.  Being upfront about this has worked very well in ATDC’s Industry Connect program where we connect our startups with Fortune 1000 and established companies as early (paying) customers.  Innovative companies realize it is less expensive and easier to be early than to bear direct and indirect costs of catching up with a competitor leveraging that advantage.

The other key is understanding the nature of the request.  The question really comes down to addressing risk and sometimes internal procurement requirements.  In cases of internal procurement requirements it is necessary to have a senior ‘sponsor’ to help overcome the old additive that “you never get fired for hiring IBM”.  Addressing the risk is often more straight-forward, either by picking appropriately scaled initial implementations or by addressing continuity of operations in a worst-case scenario.  In some cases letting the customer know that you are privately held and do not release that information, in conjunction with addressing the risk issue may get you past the request.

When that isn’t enough, here are a few tactics that I’ve seen work:

Establish a source code escrow – Offer to deposit your source code with a third-party.  Escrow providers have a process for releasing the source code to the customer under certain pre-defined events that would limit the customers ability to maintain the applications.  Some escrow providers offer (and customers sometimes require) additional integrity testing and validation services where they validate the source code, perform a ‘build’, and create documentation for a deployment plan.

Dedicated instance - The source code escrow is the most common way of addressing the risk – but as more applications are moving to the cloud and often depend on connectivity to other services or data sources, savvy customers realize having the source code may not be enough.  All of their data may be in your application.  In these cases a ‘dedicated instance’ of the application running in a third-party hosting environment with the customer listed on the contract for access may be the best solution.  This only works for applications that are priced high enough to afford the extra expense.

Investor letters – In one of my companies we had our investor (in this case Total Technology Ventures) provide a letter of financial support that we submitted with our financials.  The letter was non-binding, but expressed their support and plans to continue to fund operations.

‘Affiliate of’ – In another startup we sold to banks and they were legally required to review our financials.  We explained we were a startup but had solid financial backing.  We positioned ourselves as an ‘affiliate of’ our lead investment firm and they accepted the investment firm’s information as a substitute.

Pot sweetener - A tactic I learned working with Bert Ellis and Bill Nussey that we used successfully at iXL was to offer an incentive – either in pricing or in warrants for early ‘big logo’ customers.  This was essentially a more aggressive form of transparency.

These tactics should only be used when the rest of the deal is in place – all the issues have been addressed and they are ready to purchase.  In the end, the best strategy is transparency and getting them to work on your behalf to get through the procurement process.  If you are selling a ‘pain-killer’ and have senior executives involved in the decision process, more often than not you will be able to navigate through the issue by addressing the underlying risk of continuity of operations and picking a suitably scaled initial deployment.

What else?  What has worked for you when you’ve been asked to provide your financials?

Sep 172013
 September 17, 2013  Posted by at 10:06 pm No Responses »

Today I was a guest at the Georgia Research Alliance Board of Trustees meeting at Coca-Cola’s Headquarters.  I was invited to share my thoughts on GRA’s new Industry Fellows program.

The GRA is an incredible resource for Georgia.  It is a public-private collaboration among business, state government, and 6 Georgia research universities (Georgia Tech, Emory, Georgia State, UGA, Clark Atlanta, and Georgia Regents University).  GRA recruits world-class researchers to these universities through the GRA Eminent Scholars program and helps commercialize research out of the universities by providing grants, loans, and investments in university-based technology.  Check out some of the stats on their success here.

GRA recently conducted a study of the success rate of the ventures they have funded.  They are significantly beating the odds for early stage ventures.  That’s impressive given the deep science and very early stage nature of these startups.

They also looked at the failures and studied why they were unsuccessful.  No surprise – a leading cause was not having the right team.  In response, they created the Industry Fellows program to pair up experienced entrepreneurs and industry executives with the GRA companies to help mentor and connect them with early team members.  Mike Cassidy, the CEO of GRA, called it “the eHarmony of Georgia’s technology sector”.

GRA has a heavyweight Board of Trustees (Check them out here).  I focused my comments on why leveraging experienced entrepreneurs and industry experts in the customer discovery and business model creation process is a ‘best practice’.  Here’s a summary of my presentation:

  • First year companies in ATDC’s 3 year incubation program quickly learn that building a successful company requires more than an idea and an innovative technology
  • To succeed they must develop a business model and gain access to 4 resources: customers, capital, talent, and coaching.
  • ATDC leverages experienced entrepreneurs and industry executives through our Entrepreneur-In-Residence (EIR) and Mentor programs to help the companies discover a scalable business model and gain access to those 4 resources.  CEOs tell us it is the most valuable part of the ATDC experience.
  • The Industry Fellows program has the opportunity to do the same for researchers and GRA companies.
  • GRA companies entering ATDC are often still in ‘project mode’ – taking on projects to fund their activities and research rather than discovering a scalable business model.
  • Injecting mentoring earlier in the process will increase the pace and rate of success
  • GRA provides critical seed funding for early stage university-based startups (something that is in short supply in Georgia) and the Industry Fellows program will help the companies get farther on the funding provided by GRA.
  • In a startup you are betting more on the team than the technology
  • Since researchers are almost never the ones that will go on to build the company, the Industry Fellows program will help them connect with potential CEOs and early team members.  Keith McGreggor, Director of VentureLab at Georgia Tech, says that is the hardest part of what they do.
  • Georgia is fortunate to have world-class research universities, but entrepreneurs don’t know how to access the innovation on campus.
  • Entrepreneurs will be excited to join the Industry Fellows program since they are wired to ‘give back’ and value networks that give them access to sources of innovation that will lead to future startup opportunities.

As a bonus – Governor Deal also attended the meeting.  Here are a few highlights from his comments:

  • He talked about why GRA is important to Georgia’s economic development efforts.
  • He mentioned 3 emerging sectors he sees: immunology, cancer research, and internet security
  • He mentioned 3 GRA startups by name: Damballa, Urjanet, and MedShape
  • GRA’s 60+ Eminent Scholars have attracted over $200 million in funding to Georgia and employ over 1500 scientists and engineers
  • He talked about why the Affordable Care Act would impact Georgia more than some other states.  He encouraged startups focused on better and more affordable healthcare.
  • As a parent, my favorite part was Gov. Deal “let out a secret” that they were looking to follow the Eminent Scholars model and create an Eminent Teachers program for K-12 education, calling it “the greatest opportunity for the least amount of money”.  I agree – it’s an awesome idea.  See Maria Saporta’s Atlanta Business Chronicle Article on this here.