StartupCFO

Why I will never be a founder

2009-07-13T05:18:00.003-05:00

I've been doing the startup thing for over 10 years now. For all of that time, I've been in senior roles - leading finance, corporate development, partnering, operations, support, etc. across a handful of great companies. Along the way, people have asked a flattering, yet natural question: when will I found a startup of my own?

The truth is, I have thought about it. Early on, I deliberately exposed myself to areas of my companies that were not my responsibility (even ran development for one scary week when a CEO was away). I was training myself to run a startup. But over time - especially in the last two years, I have come to two conclusions:

1.) I absolutely love what I do and would lose a lot if I was not spending my days advising founders / CEOs and making financial deals happen; and

2.) I believe that founders should be technical.

The 1st point is self explanatory. The 2nd you may or may not agree with it, so lets dig into it.

When you're creating a startup from nothing you need to build a strong foundation. That foundation is a technical one. It is true that in the era of web 2.0 the technical hurdles have come down. We have frameworks, tools and platforms to help us launch faster and the key to success is less about algorithms and more about user experience. Still, you need to be technical. Its just that technical might mean you're a product or UI person on the web vs. a developer more generally.

Now, I do work with some CEOs that are not technical. I'm not saying they can't be successful. And if they come from a marketing background, then they bring another important element to the equation. But, I feel that especially in the early days, if you're not technical enough you have a big, important blind spot.

How do you know what's possible with your technology? Do you know how fast you can launch? How do you fully assess the technical hires you make? Do you base your strategy on commercial moves or on an understanding of your technical platform and just how far it can go?

There are many questions that are best answered from a technical or product foundation that are key to startup success. So, for me anyway, I know I will not be running a startup any time soon. And that's just fine with me.

Competitive fundraising intelligence

2009-07-09T12:41:00.003-05:00

Sites like Crunchbase do a great job of updating us on fundraisings in our space. But sometimes you want to dig further in to the financing transactions of your competitors. Here's a great way to do it for free:

As you probably know, all issuers (in the U.S) must file a Form D with the SEC.

From this link:

You can search using the exact full legal name of the issuer.

This will then show you a list of recent filings. If there's one you want to see, you can click on the file no to see an electronic copy. Sometimes, these electronic versions are not complete. If that is the case, take the filing # and enter it here:

http://www.sec.gov/cgi-bin/request_public_docs

After filling out this form, Thomson Reuters contacts you to arrange for a nominal payment. They then send you a complete PDF and paper version of the filing.

You can find all sorts of juicy details on these searches, such as competitors who say they have raised a new round when all they did was get a bridge loan.

Hope this is useful for you...

P.S.
You can also enter a company name in this site and be notified every time they make a filing with the SEC....

http://www.fundingsleuth.com/

Validation: You can't raise without it

2009-07-07T04:49:00.003-05:00

Once upon a time, a startup could raise its initial cash on story or promise alone. All you needed was a good understanding of a problem or opportunity and a plan to exploit it. As you raised follow on funding, you were expected to have external proof points. But out of the gate it wasn't needed.

I am working with several companies raising angel $ these days and I am finding that even at the earliest stages, investors are looking for market validation. It's no longer enough to have a good idea. You need confirmation that your target customer agrees with you and would be willing to pay you money.

This may sound like a big burden if you're just starting out, but I assure you its time well spent. Startups can lose time and money building things the market does not want or need. The sooner you're out there pitching your wares the better.

At the pre-funding stage, all you need is a couple of slides / mock-ups. Even if you don't know your target customer directly you can get to them. I find most customers willing to take a call from someone who promises to have an innovative solution for them at some point.

If you're planning to fundraise soon ask yourself: do you meet the validation test? If you're generating revenue, then you do. If you're pre-revenue, what proof points can you offer investors to show that the market wants and will pay for your stuff?

Discussing valuation

2009-07-06T05:46:00.004-05:00

How many times has this happened to you? Towards the end of your 1st meeting with a potential investor, after you've told them how much money you're raising and what you plan to do with that money, they respond by asking you how much your company is worth or how much of your company you're willing to sell for this money? How did you respond?

To me, in most situations, this is a trap question and there is no benefit to answering it. Answer too low and you will look like you don't know the game and your deal won't be attractive. Answer too high and you could put a real chill on their excitement.

Valuation is pretty simple for startups. There are no discounted cashflows. Instead, there are conventions that apply. You pretty much know how much dilution to expect at each stage. How much you vary from those standards depends on factors such as:

- How hot your company is? (the space, management team, traction, etc)
- Whether many VCs want to invest (i.e. you've created deal competition)
- Whether your potential investor really gets your company - and you

None of these factors are usually present at the 1st meeting. They happen over time as you spend more time together and ideally spend time with over investors too so that you get a few to the term sheet stage at the same time.

If you look at the public markets you see the same thing. Even these mature, bigger companies don't talk valuation up front. When you're going public, you circulate an initial prospectus and gage interest in your offering before setting a value. Early in the process a range of values is set. But the actual valuation is a last minute decision. It should be for you too.

Next time you're asked for your valuation expectations, don't answer. Tell the investor your main focus is to find the right investor and that you're confident the deal terms will work themselves out.

This answer, by the way, has the added benefit of being true. It is far more important to get the right investor on board than to get a higher pre-money value. Getting the wrong investor can make your company worthless. A bad fit between you and your investors will just grind you to a halt.

So, just like you don't ask someone about a pre-nup on the 1st date, so too should you not discuss valuation until you know you're in a deal cycle and that the other side is hot and heavy for your deal.

Community Update

2009-07-05T07:38:00.001-05:00

Here's the update for June for the YourStartupCFO Community:

New Members

We welcomed 30 new members to the group. Total membership as of today is 288. The searchable member list (you can sort by location, industry, title, etc) is here.

In case you missed it...

We had some good discussions on the group this month:

- Debate around the budgeting process

- Discussion about Class R Stock

- Offering equity to staff when you're bootstrapping

- Valuing services companies

New Readings section

I have created a new section in the Forums to share interesting papers and articles that I receive. I probably don't have permissions to share them all, but figure given the quality of this audience that the authors won't mind.

That's it for now.

Valuations and Exits

2009-07-02T06:00:00.004-05:00

Investment valuations and exit markets go hand in hand. When exits are happening you can get a nice valuation. When they're not, you can't. It has nothing to do with the merit of you or your business - its all about the likelihood of getting out at a sufficient level of return in the future.

Venturesource released some disturbing data on VC liquidity in 2008 and 2009 yesterday. Here's just one slide that I found particularly alarming:

Median M & A returns are currently at the same level as they were during our last downturn. As an angel, I'd be happy with $20M+ exit expectations. But as a VC, I would not.

I have a few takeaways as I look at the exit data:

- Now's a great time to be a VC with a new fund. If you have capital and are doing new deals, you can go bargain hunting. This bodes well for the new capital about to come on line in Quebec and the rest of Canada.

- More than ever, entrepreneurs needs to be capital efficient. At these valuations, capital is just too expensive to be dependent on it.

It's all about revenue. Sales have always been and always will be the best source of financing.

Elements of a great web business

2009-06-30T05:12:00.006-05:00

I mention Freshbooks often in this blog. Its not just because they're Canadian or that my picture is up in their toilets, its because they do great things that we can learn from. I have been seeing several new web startups recently. In order to better rank them I developed a simple checklist of elements that I look for. Interestingly, Freshbooks has them all. Without further ado, here's my list:

Daily use: I log on to Freshbooks (FB) every day. This bakes in the habit. With services that I use less frequently (say a web presentation service or search service other than Google), I am indifferent at best and open to alternatives. With FB though, I ain't switching.

Direct tie into revenue: You can't get a more direct tie in to your customer's revenue than with a service that enables them to invoice. If your service has a soft benefit (saves time, is more fun that the alternatives) you will have a harder time monetizing. But, if your product or service has a hard benefit (make more money, etc) then you're off to the races.

Customizable: This is not unique to FB but many web services still lack this surprisingly. I like that my clients see an environment with my look and feel. This is important for any web business that has B2B customers.

Personality: I like that FB has personality. It gives me cheeky little messages when I post time. This is related to authenticity which I think is big for startups. Be yourself. When you communicate with users be real. No corporate speak. No boiler plate. Jason, our crazy support leader at Tungle is another one who really gets this.

Extensible: There is a nice little ecosystem of 3rd party add-ons + integrations around the core FB platform. This brings more value to users and is a nice way for FB to co-market, partner and acquire even more users.

Love: As I posted about recently, FB gives their users a lot of love. This is something all web startups should do, yet I could list of tens of services that I have signed up for where I have heard nothing from the company. No attempt to onboard me properly. No attempt to increase my engagement. And no, Yammer-style spams don't count.

Tiered pricing starting from free: Several startups do this well including FB and 37 signals, but I like the pricing plan. It starts with a complete free offering, but if I'm serious about using the app, I quickly need to start paying. The pricing plans enables me to start small and grow over time.

That's it. This list is about building a great web business, not an application, though of course there are aspects that are app specific. Hope you can help add to it or refine it.

Related posts:
Building a great consumer web app

The Startup Funding Gap - from Angel to VC

2009-06-26T10:50:00.002-05:00

This week, I was on a call with an active US Angel who said his group is looking for deals where the company can get to break even on $750K of total investment! Now, in the grand scheme of things, $ 750K is not a lot of capital. And there is a big gap between this and the traditional sweet spot of the bigger VC funds that are looking to place $2M - $5M in at the beginning with up to $10M over the life of the investment.

If you're pitching angels and they are looking for such capital efficient deals, then you need to know where their ceiling is. What is the max you can raise in general before you get into VC territory? And of course when it comes to VC the big question is: does your company have the team, traction, metrics, growth and exit potential that they are looking for? You need clear answers to these questions in order to lay out a credible strategy for raising money.

To help guide you and the startups I work with, I turned to two experts in angel financing: Bryan Watson, President of the National Angel Organization and Basil Peters, an experienced Angel, former VC, author of the excellent Angel blog and book on Early Exits. Here's what they had to say:

Bryan:

"A lot of Angels, it seems, are moving to this sort of deal because it has the promise (if not the reality, sometimes) of capital efficiency. Good for Web-tech companies. Not good for biotech companies.

The problem: The capital risk Angels face (i.e. where is the next round coming from??) has shot through the roof over the last 6 months. Many Angels no longer believe they can rely on the capital ecosystem to provide subsequent rounds of financing.

Realistically, most angels know their investee companies may need additional funding to get to break-even (enter co-investment). Looking for investments that “only need $750k” helps to screen for capital efficient businesses.

If I had to give numbers, the current sweet spots I see in the Angel community (i.e. where deals seem to be getting done) are raises of $200K, $500K, and $1mm. Through co-investment, those numbers are increasing. I am starting to see the company asks come into line with that now as well".

Basil:

"Generally, angels today want to invest in companies where they can get their money back in 3 to 5 years. That precludes traditional Venture Capital funds. Angels prefer companies they can finance themselves all the way to exit. A couple of years ago, I would have said that angel funding topped out around $1 or 2 million per company. In the last couple of years I’ve seen quite a few companies that have raised over $5 million from angels.

In summary, I think angels prefer to find companies that will require a million or two to fund to exit, but now with syndication between angel groups, the upper end of the range is now $5 to 10 million. The most important thing is alignment on a realistic exit strategy before you approach the angels".

So, what I take from this is if you want to raise from angels first, you need to start with a story and plan that is truly angel friendly. You need to show you can get to cashflow break-even with $1M or less of financing. That means early commercialization and very tight expense management. You may choose to raise more capital and go for a bigger opportunity, but if your business plan depends on raising more capital, then - in the current environment at least - your plan may not get funded.

SaaS is not cheap - part deux

2009-06-25T12:29:00.003-05:00

Prasad, co-author of the Startable blog and CEO of Pixily asked me to expand on why I feel that SaaS is not cheap. Rather than just post a comment, thought I'd post the response here as well.

There are two main reasons why SaaS is an expensive (but still great) business model:

1.) Distribution of revenues: Monthly vs. up front one time. This has immediate cash implications due to revenue timing, but also means you need to staff both dev and outward facing roles to fight for retention. In a traditional licensing model, you hope your customers use your stuff, but ultimately it does not matter (obviously in the long run, if your product is irrelevant, you're in trouble, but the point still stands).

2.) Operating costs: Amazon is a great way to start and you can run for a while on it. However, I will bet that if you graph the cost curves of cloud vs. running your own network that you hit an inflection point where buying your own gear becomes cheaper. Also, if you run a big enteprise service with service level agreements you likely want to control your network.

Of the two points, the 1st is the biggie. Customer acquisition costs are the single biggest barrier to growth and in a World where customers churn out (stop paying you) before you would have earned the equivelent of what you would have charged with a traditional licensing model then you need more to capital to acquire more customers to generate the same revenue.

Make sense?

SaaS is not cheap

2009-06-22T06:15:00.001-05:00

I love SaaS, both as a buyer and a vendor, its a great business model. But I often hear people say that their business is capital efficient because its a SaaS model. This is just wrong. SaaS is a great low cost way to get started. No upfront capex. Scale your backend as your business grows. Pay Amazon a few bucks a month. All good. But, to achieve true scale, SaaS businesses require serious capital.

Take Adaptive Planning as just one example. This company offers big ticket financial planning software as a service to mid market public companies. They have raised $ 33M to date and are looking for more. They are still not cashflow positive.

Most startups do not achieve the kind of scale that Adaptive Planning, Netsuite, Salesforce and other big SaaS companies enjoy. For this reason, SaaS can be a great way to get going. But to be clear, if you plan on building a truly global market leader in your space, expect to raise a lot of capital.

As Chris from iNovia says: "SAAS is clearly capital intensive. Company exchanges upfront license payments for smaller monthly recurring revenue".

For more on SaaS and VC, check out Bessemer's pages on this. They have a real focus and expertise in this space.

Pitching VCs

2009-06-18T08:36:00.002-05:00

I was at the NYC Venture Summit yesterday. If you missed me, Chris, John and Craig clogging up the twittersphere with posts from the show, you can find them here.

The highlight of these events for me is hearing companies present. Got to hear a lot of pitches yesterday, including one from my client Biztree.

Without further ado, here are my notes taken throughout the day about some do's and don'ts of pitching VCs:

Avoid buzzwords: ecosystem, synergies

Be specific about how you will acquire users / customers and how you will make money

Be realistic: Just because you’re on Facebook does not mean you will get 200M users

How: Nobody cares how you do what you do. At least not in the 1^st meeting.

Never tell people your projections are conservative. I should not have to write this, but I still hear it

Video or other multimedia – just not worth the risk

Be energetic – especially if you’re pitching right after lunch!

Bad sentences:

"There’s no pure competition for what we do"

"Our projections are conservative"

"Our exit strategy is to get acquired or go public" (duh!!!)

"The landscape is crowded" (yes, I actually heard this)

"We are capital efficient because we’re a SaaS model" (SaaS is not capital efficient in the long run. Stay tuned for a post on this in the near future)

"We have a great business model – SaaS" (note to presenter – you did not invent this. Everyone does it)

Toilet wisdom - freshbooks style

2009-06-17T13:43:00.004-05:00

A friend just came back from Freshbooks' most recent how to build a web app seminar. She shared this photo with me from, ahem, the ladies room. You'll recognize the source of this tweet as yours truly.

Thanks guys, I am flattered to be posted in such an exalted place.

Pen and Paper

2009-06-17T07:57:00.004-05:00

Like you I'm sure, I've had a lot of things on my mind lately. Juggling multiple projects, assessing new opportunities and trying to think clearly about the best way to get things done. When we're trying to stay on top of everything, its tempting to just sit in front of your computer and knock things off one by one. But, sometimes stepping back can be way better.

Yesterday, I took the advice of my most trusted advisor (aka - my wife), and for a full two hours left the laptop & cel phone off. Just me and my notepad. I jotted down what I was thinking. Made lists. Scratched things off, added things, etc. I left that session with a clarity and peace of mind that would not have come from just grinding away.

This is not groundbreaking stuff, I know. I guess, my point is, its important to regularly find time for clear thinking with no interruptions. Just you and your thoughts. I'm going to make this part of my weekly routine, so that I end each week with clarity and calm and readiness for the week that's coming.

Photo credit - http://www.flickr.com/photos/almemedia/3218378224/

Startup location matters

2009-06-16T05:38:00.004-05:00

Techcrunch published an interesting table yesterday showing startup count and acquisition rate by State (reproduced here). This is by no means conclusive since it covers a two year period and thus cannot cover the full lifecycle for all the companies, still there are some interesting takeaways for me.

1. Density matters: I hate to reinforce the notion that its all about the Valley, but just look at the startup concentration there. Almost 3K startups (about 4x more than the next closest State).

Every time I go to the Valley, I come back energized. This is why. There's a buzz that comes from this density. When you're walking down University Ave in Palo Alto you just feel it.

Density has several advantages beyond caffeine-like stimulation: All the elements are there from universities cranking out smart grads with relevant education and a built-in desire to start something all the way to big local public acquirers and everything in between. This gives the Valley an unfair advantage and is why you see this density. Its chicken and egg and self fulfilling.

2. Your startup likely will not be acquired - unless you work like crazy to make it happen: This is incomplete data to be sure, bet lets say the average startup lifespan is 2 - 6 years, then based on just straightlining the data here (not a scientific method, I know...), then at most your startup has a 24.6% chance of being bought (3x Washington States' 8.2% for 2 years).

The truth is, if you start something dreaming of riches, you'll be dissapointed. Start it because you see a big problem or opportunity that you're passionate about. Start because you could never work for 'the man' and you know you're an entrepreneur. Work like a mofo. Solve the problem. Add good luck and timing - and *maybe* you'll be rich. But this should not be your primary driver.

Location: Canada

Thinking about the Canadian scene right now and the opportunity we have to build something great (see yesterday's post and in particular Chris from iNovia's comments), we need to build density around one or more of our big Canadian cities. And we need more local acquirers. Seeing big public Canadian companies get taken out makes it harder to sell our Canadian startups.

The state of the Canadian VC industry

2009-06-15T05:19:00.007-05:00

The Wall Street Journal recently reported that VCs are heading for the door. "Not since the dot-com bust has the industry experienced as much turnover as it is now". Partners from some of the biggest funds have retired or otherwise moved on. The same is true at all levels of these funds.

Healy Jones, a friend and former Associate at Atlas Ventures gave his very personal account of why he recently left the VC industry here. Its definitely worth reading. What should we make of all this turnover? Is this just part of the normal cycle of expansion or contraction that all industries go through? Or is there a bigger story here?

While the WSJ article talks only of contraction, there is still growth taking place in the industry. PEHub recently reported about five new and relatively small early stage funds.

VC in Canada

Here in Canada, we're getting set for what I hope is a period of big growth, due in larger part to the Quebec government's $ 700M commitment to investing in innovation and entrepreneurship. Jacque Bernier's Teralys Capital fund of funds is getting set to have a big impact! Alberta's largest fund manager has also recently announced a $1B commitment to private equity investing.

So, who's got it right?

As I look at these varying stories - tier 1 US VC funds like Atlas, Bessemer and Vantagepoint downsizing, while the Canadian space gets set to expand, you have to ask who's got it right? Is Canada crazy or inspired to be expanding? Are the US funds that are downsizing smart or unlucky that they can't get more capital now?

Traditional investing theory says: buy low and sell high. While public markets (led by the tech-heavy NASDAQ) have recovered somewhat from the beating they took after the U.S. credit crisis, startup valuations are still down. So, from the point of view of pricing, now is a great time to be investing.

In the absence of another big market shock, then the primary buyers of startups and their products and services should see a broad-based recovery. And with all this new capital coming in, the Canadian industry can afford to take a long term view. So, I'd have to conclude that the decision to invest in the industry is inspired, and timely. With one but...

A new approach

If these new VC funds execute on the same model of the past, then we should expect poor returns. in its 2009 report on emerging Canadian Software companies, PwC reports that "the median Canadian VC has shown a cumulative-since-inception return of 0%". This is for a 10 year period that includes the end of the last bubble. Two years from now, those returns will be negative. More of the same just won't get the job done.

The new commitments to VC and PE in Canada are coming from public / governmental sources. That's all good, but for the long term health of the industry, private pension players need to be drawn back into the mix.

I am hearing a lot of encouraging talk about new models and approaches to VC investing - especially at the seed and early stage level. We have a small market here in Canada. We have to do things differently. People cite the Israeli-model as a great way to build a successful startup ecosystem.

Bottom line for me: I am truly excited for the future. I am looking forward to seeing these new funds come online and for some fresh thinking (from all players) about how best to build great, valuable companies. So, from where I stand, the state of the Canadian VC industry is looking good.

Update:
I guess the Canadian VC industry just got even better: The Canadian government has announced $ 350M in new commitments to venture capital: $ 260M for BDC and $ 90M to invest in new, private funds. You can read about it here.

Building great consumer apps - a checklist

2009-06-10T07:13:00.003-05:00

Fred Wilson's post yesterday on what drives consumer adoption of new technologies generated a ton of really useful comments. I mined those to produce a simple checklist that you can use as entrepreneurs and investors in assessing consumer applications:

Simplicity

Purpose / utility

Entertainment, experience, sex appeal, wow factor

Potential for complementary apps (your own or 3rd party)

Viral

Potential for peer pressure

Daily use

Socialness / observability

Does it create new content?

Free trial, no barrier to 1^st usage

Profit Hot 50: Canada's hottest Startups

2009-06-08T05:50:00.004-05:00

Profit, Canada's leading magazine for entrepreneurs, is holding its annual contest to find Canada's top 50 emerging growth companies.

Now in its 10^th year, the PROFIT HOT 50 is the definitive list of Canada’s Emerging Growth Companies, ranked by two-year revenue growth.

You’ll enjoy many great benefits as a PROFIT HOT 50 company, including coverage in the October 2009 issue of PROFIT Magazine and online year-round at PROFITmagazine.ca. PROFIT HOT 50 leaders also receive a complimentary invitation to GrowthCamp, an exclusive three-day summit at which PROFIT HOT 50 leaders share ideas, learn from experts and make valuable contacts.

If your firm was launched in 2005 or 2006, then enter the PROFIT HOT 50 today!

The entry deadline is June 30, 2009.

Apply now! For more information or to enter online, visit http://www.profitguide.com/awards or call 1-800-713-GROW.

Startup Accelerators

2009-06-04T07:10:00.003-05:00

Startup Accelerators seem to be all the rage these days. Highly visible programs like YCombinator, Techstars and Launchbox Digital have really shone a spotlight on this space. I recently came across a series of interesting posts on accelerators (see bottom of this post for links).

In some respects, these accelerator programs are just incubators under a different name. If you were around 10 years ago, you'll remember that incubators like Idealab were all the rage but failed to really deliver or prove the model. The term "incubator" quickly became a bad word.

As a concept, I think accelerators or whatever you want to call them are good - especially for web and mobile web startups that don't need lots of capital. Startups need lots of love to succeed, and these programs deliver that in the form of strong mentorship and preparation for follow-on funding.

Ultimately, these programs will be judged by the success of their investments - i.e. the returns they deliver. There have been some big exits out of these programs already, the most notable being Reddit which exited for $ 12M. Most of the exits are too small to be publicly reported so its hard to really measure returns.

The fact that these exits are small is not a bad thing. By their very nature, accelerators cannot afford to produce companies that then feed into the normal VC ecosystem. These programs take 6 - 10% of your startup and most do not make additional investments. So, their ownership can only go down.

For these accelerators to work many of their startups need to avoid raising lots of capital and settling in for a long ride, and instead work towards a near term early exit.

For young, unproven web entrepreneurs these programs are probably one of your best paths to funding. Getting in validates you. And you will emerge better and more prepared to make a go of your startup and get in front of investors. However, with VCs and Angels being more conservative and looking for more traction before they invest their will still be a big gap between what accelerators provide and what they're looking for. How do we fill that gap? That's a post for another time...

New VC Business Models - the rise of Business Accelerator Seed Funds

Part 1
Part 2
Part 3

Early Exits

2009-06-02T07:24:00.005-05:00

Back in January, I wrote about the oncoming era of the "small exit". I felt then (and still do) that the combination of capital efficiency, the bad fit between traditional VC and today's young startups, the sheer number of startups vs. amount of available capital (especially here in Canada) all pointed towards small exits. Vancouver-based Basil Peters has written a book on this topic which I recently had the pleasure of reading.

His book Early Exits covers his considerable personal experience as a founder, VC and now angel investor. His thesis for the book is as follows:

"Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan for an early exit to a large company in just a few years for under $30M."

There are many reasons why this message likely resonates with today's tech entrepreneurs:

- VC is getting harder to find. Funds are getting bigger and only want to do deals that require a lot of capital

- Its easier to generate "small" exits than big ones but small exits don't interest VCs

- Putting a few million in your pocket as a founder can change your life

- As VC has gone through some challenges we are seeing more and more the impact and scope of angel investing

Basil lays out a compelling case for early exits. We all know that taking VC is no guarantee of success. In fact, Basil has shown that VC-backed companies have considerably longer time to exit and lower rates of success. There is no question, that his message is anti-VC. And since this comes from a former VC, we should take note.

Basil covers many important considerations for entrepreneurs and angels as they plan for their exits. Some highlights:

- Founder shares should vest over time with 1/2 vesting on exit (since up to 1/2 of the value creation comes here and all of it is realized here).

- Aligning on exit strategy can be the single biggest factor in determining whether founders actually realize the value in their shares.

I agree with both of these points, especially the latter. I have seen the complete paralysis and disfunction that comes from having stakeholders that are not aligned.

For someone who has spent the last 10 years raising VC, Basil's book and message will not have me abandoning this market. The fact is: not all startups *should* raise VC. However, you don't have to choose your path right away. You don't have to decide between a big swing for the fences raise lots of $ strategy vs. an angel-fueled early exit play.

To me, the ideal strategy for most startups (especially in the web, where I spend most of my time) is to raise modest amounts, keep burn low, be positioned for the early exit, BUT if you feel you can and want to make a big play, then have the team, technology and traction that will enable you to fund it and go for it! In other words, have your cake and eat it too! This also enables you to go down the VC path should you choose to from a position of strength as you will have more of the elements that they look for in a deal. The best time to raise VC is when you don't need it. So, building a business that does not depend on it can only help you if you decide to take VC down the road.

I definitely see the potential for early exits. This is in fact one of the big reasons why I scaled back from doing one startup at a time to taking on several: So that I could help finance, grow and sell startups that may never be big enough to need a full time in-house CFO. And will never be big enough to work with great M & A advisors that can increase their exit value.

If you have not done so already, I highly recommend you read Basil's book. You can get it here.

Community Update - May

2009-06-01T05:35:00.001-05:00

Here's what happened on the YourStartupCFO Community last month:

New Members

We welcomed 18 new members to the group. Total membership as of today is 258. Our new members are very diverse. Only two are CFOs.

In case you missed it...

We had some good discussions on the group this month:

- Some thoughts on when to use an open source business model for a web startup

- Advice on when to issue shares to an advisor in exchange for services

- Some thoughts on best practices for compensating your head of Sales & Marketing

- Tech compensation stats

Member networking

As the person running this community site I get to see everyone who joins. We've got some pretty impressive people and companies. So, I thought it would be a good idea to share the member listing so that members can more easily connect with each other. I don't disclose anything private (such as e-mail). The goal is to get members connecting with each other in the real World and doing business together. I publish this list every month. I've been doing it for three months now. The feedback has been good so far.

That's it for now. If you are a tech CFO, entrepreneur or investor, come join our group.

Usability and the CFO

2009-05-31T09:43:00.002-05:00

Back at Terrascale we had a pretty complex product. Scalable storage for big Linux clusters is not for the lay person. When I joined there was a project codenamed "Monkey" to simplify the install script so that even a monkey could get the product up and running. The CEO in his usual dry humour decided to raise the bar even higher imploring the dev team to make it even simpler so that a CFO could install it.

While he was joking, designing your product with a CFO in mind is a good idea. Why?

- As a rule, we're not technical (there are some exceptions to this...)
- We're demanding. If you can please us, you have something good
- We have budget (self explanatory)

I went through a disappointing experience this weekend with a product that I love and recommend: Dropbox. I use it to share files with my team and clients. I discovered this weekend that the sharing permissions do not work the way a non-technical CFO would expect them to. Perhaps the logic of their sharing makes sense to a techie. But to me it doesn't and they lost some of my trust.

You can't please everyone and with the Drop Box example in particular, I could be the only person who feels it should work differently. Still, pleasing the person that holds the purse strings inside your customer is never a bad thing. Keep us finance folks in mind as you build your products and services.

Can a company be too friendly?

2009-05-29T06:50:00.002-05:00

After e-mailing Freshbooks support for the 3rd time in two weeks, I find myself wondering: can a company be too friendly? Companies like Freshbooks and Zappos have built their business in large part around inspired, personal service. This is a key part of their strategy and is working by all accounts for them. Zappos is a $1B company and Freshbooks just hit the cover of Entrepreneur Magazine.

From a financial perspective - is there an optimal balance between personal service (which requires bodies and costs money) vs. do it yourself online service? If Freshbooks wasn't so darned friendly, I'd probably look online for the answers I need. Or if they were on Get Satisfaction, I'd ask the community if I couldn't find what I needed on their site directly. But since they are so bloody friendly (and quick), I don't think twice about e-mailing them.

The Startup 101 playbook (especially for web companies that touch *many* users) says: get close to your users. Build a relationship. Engage them. So, personal touch certainly achieves that. Web businesses live and die by their per user economics. Do I earn more per user that it cost me to acquire him? It can certainly be argued that personal touch is a key element in retaining users. They stay with you longer, pay you more and refer more people if you give them lots of love. Also, that direct interaction should feed into your product planning, messaging / positioning, culture - essentially every aspect of your business. So, its definitely the way to go.

My only question is: is there an optimum mix of high cost / high touch vs. low cost / low touch that still allows a business to keep users happy and paying while lowering the bodies needed to serve them?

Matching words and numbers

2009-05-28T05:42:00.003-05:00

This week, one of my clients presented its new plan and story to its existing investors. We wanted to get feedback as we finalized our documents and got ready to hit the road for new money. As we covered the financials (not usually the most important slide in a VC pitch) the investors asked: "How do these numbers match with what you are saying about the market and your position in it?"

This is a great question. When we talk about where a market is going - market size, growth rates, trends - we're dealing at very high levels. Conversely, when we model the financials of a business, we're down in the details. Its important to step back and make sure these two reconcile.

For example, If you say you expect to be a big player in your market 2 or 3 years from now, then your metrics, user base, units sold, revenues, etc had all better reinforce that. Its all well and good to build a business that's selling $20M - $50M in the near future for example, but if that amount is inconsequential relative to the market size at that time then you're not supporting your claim that you'll be a player.

In the case we had this week, the numbers did reinforce our claims about market share. But we had never explicitly checked for that. The question was a good reminder to step back and make sure the high level story and low level details all reinforce each other.

Twitter: The perils of too much capital

2009-05-26T07:18:00.003-05:00

Everyone's favourite startup Twitter is apparently demonstrating one of the many perils of having too much capital. Techcrunch reported yesterday that Twitter is in talks to create a TV show.

At the very least this is lack of focus for a company that does earn any revenue other than interest from its cash balances. I fear however, that this is a sign of hubris. And for those who study history, you can recite many examples of where hubris begets nemesis. I.e. bad things happen...

With 32M users already there is no reason why they should not have revenues happening. So Biz and Ev - please, for the CFOs in the house, go and figure out your revenue model before planning your TV show!

Tandem Expansion Fund - welcome news for growth companies

2009-05-26T05:41:00.001-05:00

When we read about the funding gap for startups, most often we hear about how hard it is to get money at the early stages - that there is gap between angel / friends and family and 1st VC money. This is true. The barriers to getting funded have gone up since the credit crisis of last Fall. VCs now look for "B" round traction when doing "A" rounds. And Angels are looking at deals that would normally qualify for VC rounds.

While this is indeed a problem, another less publicized gap exists for later stage financing. Most Canadian VC funds are positioned to do your A and B rounds. If you need big expansion capital you have little choice but to look for foreign investors. That may be changing now with yesterday's announcement of the Tandem Expansion fund.

This new fund will target rounds of between $10M to $40M and give Canadian startups that are experiencing significant growth an important new source of funding so that they can go for the home run. With Canada's biggest tech companies dwindling in numbers due to acquisition, I hope this type of funding will eventually result in a few more giants here at home.

I also hope that later stage funds like this will help some of our companies go public in Canada. Having a strong tech sector on the TSX can only help our industry.

To read more about this new fund and other news surrounding Canada's VC industry, check out Chris Arsenault's post.