Startup Funding Talk

I’ll be speaking along with some VCs about startup funding this Saturday here in Los Angeles. Should be a good event.

www.n3xtcon.com

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Some Questions Investors Will Ask You

It was a typical afternoon in Hollywood. Lunch with Rob Schneider at Xiomara restaurant on Melrose. We were meeting with his inventor, who claimed to have created a revolutionary machine to extract hydrogen from water – electrolysis. He said that he put in X amount of energy, and the machine generated 100X as output. I replied “Well, I’m just a French major, but doesn’t that run afoul of one of the laws of thermodynamics?”

He looked at me with a stunned expression. “No. Because the machine does it really fast.”

Now, I think I’ll write up this whole story in another article as it’s just friggin’ hilarious, but for now, the point I want to make is that I asked this inventor a patently obvious question, and not only did he not have a well-polished answer, he was clearly surprised to get the question itself. I was pretty sure he’d have said something like “It’s just so dang cute when liberal arts majors dip their toes in the science pool.” The meeting nosedived at that point.

Don’t let any question, much less obvious ones, catch you flat-footed when you’re grilled in a conference room on Sand Hill Road.

Yes, all investors are different, and you can’t predict what they will or won’t do. That said, there are some pretty common questions that you should be prepared to answer when you sit down with them. Or with key potential hires or Board members, for that matter.

Origin
Why did you start this company?
How long have you been in business?
Are you doing what you originally set out to do or have you pivoted?

Credibility
Who are your competitors? How are you different?
What are your biggest risks?

I put these two together because they are the two areas where many entrepreneurs lose all credibility. (These and “Top Down” as we discuss in another article.) Too often, an entrepreneur will say something like “Well, what we have is so unique that we don’t have any competitors.” EVERYONE has a competitor. You’re just not thinking broadly enough. Let’s say you make a bluetooth LED light shower cap radio. Yes, there may not be an exact match coming out of Guangzhou. In this case, you’re selling a solution to a problem that may not exist. Who are your competitors? Bath items, novelties, electronic items, gifts. Pretty large field indeed.

And don’t pooh pooh your risk factors. Investors aren’t going to think “Wow, cool, no risks!” just because you say that. Rather, one big risk will jump out at them – you. List all the risks, candidly, you know damn well what they are. You can also list mitigation factors, but go easy on them. The more candid you are, the more confident you appear, and you also start to create the feeling for the investor that they’re already in the tent.

Financial
What are your three / five year projections?
When is your breakeven?
What’s your burn rate?
What’s your business model?

Have these all prepared, clear to understand, and be ready to discuss / defend them.

Investors
What round is this?
How much are you raising?
Who invested in prior rounds?
Who else have you talked to?
Use of proceeds
What’s your exit strategy?

I’ll just highlight how much you’re raising and if you’re talking to other investors. Ask for a precise amount, e.g. $500,000. Don’t give a range: $300,000 – $500,000. Haven’t you determined what the optimal amount is? Are you not confident that you can raise what you need?

And openly disclose who else you’re talking to. Investors are herd creatures, they go where others go. You want to seem like you have too many suitors, not too few.

Company
Management team
Intellectual property / Barriers to entry

A bad team will drive a good idea into the ground. A good team will breathe air into a crappy idea. I can’t overemphasize the importance of a killer management team.

You’ll often be asked about your intellectual property portfolio, so be ready for it. But for my money, the only real barrier to entry for your competitors is your continual innovation. So after you rattle off that O’Melveny & Myers is doing your patent work for stock, follow it up with a nod to how you’re looking well past that already in your skunk works secret lab.

Oh sure, you’ll be asked more questions, and follow ons, but these are some of the most common, so be ready for them.

And no matter what question you’re asked, act as if you have been waiting for them to ask that very question. Smile. Then figure out what to say, but your very first reaction will also matter.

And if you don’t understand the question, perhaps it’s some complicated performance metric, or you don’t have the answer – be open about that too. Say “I’m sorry, I have no idea what the DAU-IRR-CLV-MPV-ROI Return Ratio is. But I promise that I will learn what it is, apply it to our company, and have an in depth analysis in your e-mail inbox by 6:15 am tomorrow morning.” Be honest that you don’t know, and in so doing, at least gain a little credibility. Investors don’t expect you to know everything already, that’s what they’re their for, but they do want you to figure out what you need to know, today. And I just like giving a precise time like that as it makes them wonder why that specific time, which gets you in their head, and it sets up a dynamic of a promise being kept.

Here’s an idea that I haven’t tried. What about an “Investor Pitch Meeting FAQ” sheet. Not your one page summary. But a more expansive document that raises the questions you expect, with your answers. That could be kind of fun. If you do it, let us know how it works!

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South by Southwest

Going to South by Southwest?

I’ll be speaking on two panels related to virtual reality – it’s ability to create empathy, and actually do good.

We’ll go beyond the current hypemania and do deep dives into the very real potential for VR to create transformational changes.

http://brinkinstitute.org/brinksxsw

If you’re going to be there, stop by and say hi!

Paul Hynek

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Necker Island

Two weeks ago I went to Necker Island, Sir Richard Branson’s private island in the British Virgin Islands.

Richard Branson is the entrepreneur’s entrepreneur – running an international Virgin empire with over 400 companies ranging from airlines to financial services to yes – Virgin Galactic. And on Necker Island, over some 40 years, he’s built, well, there’s really no other way to describe it, a paradise.

I was invited there to attend the Extreme Tech Challenge (www.extremetechchallenge.com) a wonderful event organized by MaiTai Global, an incredible group of international entrepreneurs led by Susie Mai and Bill Tai. I went with my buddy Gregg Katano who helped organize it.

The Extreme Tech Challenge isn’t only for startups – but for disrupters.

Over a thousand companies applied, and it got narrowed down to ten semi-finalists, who went to Las Vegas during the CES (Consumer Electronics Show) where I got to meet them all, and wound up having dinner with the three finalists:

Bloom
(www.bloom.life)
Technology for pregnant women

Giroptic
(www.griroptic.com)
Virtual reality camera

Sphero
(www.sphero.com)
High-tech toy robots

These three companies were invited to the final pitch on Necker Island, where the judges included Richard Branson.

It was an amazing time. Such passion for innovation, all on an island paradise with 100 staff, flamingos, lemur habitat, and the resident billionaire.

I met more cool people than I can count. Everywhere you turned there was someone fascinating.

Richard Branson was fun, smart, funny, and quite gracious. Before dinner, I went to him and thanked him for having us, and I said that although I know he had seen virtual reality, he hadn’t seen *this* in virtual reality. The *this* was him – right before the start of the Tech Challenge finals, I recorded a virtual reality picture of the scene, with audio. Sir Richard broke into a big smile as I showed it to him on an Unofficial Cardboard virtual reality headset (www.unofficialcardboard.com – I am a partner and CFO) that we had made custom for the event. He broke into a huge smile as he turned around and saw a slice of the event recreated in front of his eves. He then wrote notes on the package for the viewer, and asked a staffer to immediately put it in his office. (I’ll be happy to e-mail you the virtual reality photo, you can view it with a free app called Cardboard Camera.)

The three finalists were quite impressive. Sphero is selling the BB-8 robot from Star Wars, and they’re not exactly struggling. Giroptic has bar none the most impressive virtual reality camera n the market. But it was Bloom who won the day with their integrated approach to pregnancy.

This is why I started EZ Numbers, to be in this exact kind of situation.

I’ve mentioned in previous articles that I feel that passion is far and away the most important ingredient for a successful entrepreneur, and that was on display on Necker Island. That and rum drinks.

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Rich vs. King: The Founder’s Dilemma

So you’ve just started your baby.

Your shiny new company.

You haven’t yet even done a soft launch, but you’re already getting amazing feedback from various and sundry people. And by various and sundry people, I mean people who don’t have your last name.

Then one fine day, you pitch at an Angel event, and someone wants to invest. Trouble is, they will only do so at 20% of the valuation you proposed.

Should you do the deal?

The answer is basically yes.

Check out this HBS article on the Rich vs. King spectrum. You might be in for a surprise.

The bottom line – if you’re a control freak, then by all means, hoard your equity like Gollum clutches Precious. If you want to get rich, then don’t worry about the valuation, just focus on making an insanely great company.

https://hbr.org/2008/02/the-founders-dilemma

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“I Give You My Word(s)” – How a Business Plan Can Hurt You

You may have seen in various places on our site that we’ve fallen out of love with the fancy thirty page business plan. If you’re in startup mode, you don’t really have time to write it, and investors simply don’t have time to read it.

So it’s largely a waste of everyone’s time.

That’s why we provide the free Two Page Plan template, and don’t point you to the various sites that help you make an old fashioned business plan.

But it’s worse than that.

One of our customers made this point to us in a phone call. She’s starting a specialty food company, and needs to raise money. Before buying EZ, she did a long business plan, and poured her heart into it.

But she found that a funny thing happened. She met with a potential investor, someone for whom she had great respect and admiration. He said he would like to work with her, but that he didn’t like her strategy. She was disappointed and upset. She had so carefully crafted her approach in the business plan.

As she listened to him, she began to realize that his approach would be less expensive to start, have more potential upside, and actually fit her mission better. It was still the same basic business, just modified a bit.

But the thought of redoing the whole business plan, with all that those hours and late nights it would again require, raced through her mind.

Then she caught herself – a potential investor told her that he was interested in investing in her company, but if she adopted what even she thought was a better strategy. This was even better than someone saying they would invest – now she had a better strategy too!

The long form business plan had ossified her. The act of writing out the plan had in essence committed her to doing exactly what was in it, and losing the ability of evolving as needed. I’m not saying that you never commit to a course of action, but if anything – a business plan, a corporate strategy session, whatever – ever stops you from improving your plan to something you know is better, and cheaper to boot – then don’t be surprised if someone else does it – the world is always looking for something better.

Faced with the choice of changing her strategy or her fancy business plan, she changed her plan, and did a simple four page summary.

Did she get the investment? We’ll see, this just happened.

It’s a funny thing. Sometimes words are harder to change than numbers.

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Ok, So What Do Pre-Money and Post-Money Valuation mean?

You may have heard these terms bandied about.

Startup valuations are hard enough without some jargon to muck up the waters even more.

Fortunately, these terms are about as simple as it gets, once you learn the math.

Let’s put this in the context of a startupper named Casimir. Casimir has come up with a new Internet router technology that he’s sure will either be bought by Cisco within 2-3 years, or bankrupt them within ten. Hey, we entrepreneurs are nothing if not brobdingnagingly optimistic.

Casimir kills it at the Tri State Angel Investor Dinner PitchPalooza. Calls flood in the next day over the VOIP network powered by, what else, his new router. One Angel in particular seems like a great fit, and after a couple discussions, they’re ready to talk turkey. The investor says he’s willing to invest $1 million at a $5 million valuation. Casimir quickly crunches the numbers, and realizes that the investor would get 20%. So far, so good.

But then the investor says “And to confirm, this is pre-money.” No entrepreneur wants to reveal that he doesn’t know a basic investing term, so Casimir responds “Of course!”

Was he right to do so? Or was there some pooch screwing here?

He was right.

In the example above, the investor would get 20% of the company, because he’s saying that the company is worth $5 million, so if he invests a fifth of that amount, he gets a fifth of the company ownership. That is the pre-money valuation. Simple as that.

The post-money valuation is just the pre-money valuation, plus, yep, the money. So in this case it’s $5 million plus $1 million = $6 million.

That’s it. Valuations are often the most difficult part of negotiations with a potential investor, but this terminology doesn’t have to be.

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Guide to Intellectual Property

There are a lot of things that you don’t think of when you finally take the plunge and start your new company.

One thing that often sneaks up on entrepreneurs is intellectual property. Are you comfortable with how much you know about patents, trademarks, and copyrights?

One of the free bonuses that comes with EZ Numbers is our Guide to Intellectual Property. It walks you through the basics, and gives you some horror stories to help you avoid some really difficult situations. If you’d like a copy of the guide, e-mail us at info@eznumbers.com, and we’ll send it to you.

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EZ Numbers Free Version

We’ve just created a Free Version of EZ Numbers.

You need the paid versions to really understand your business in depth, get a loan, or get an investment. We’ve had a lot of users tell us that until they used EZ, they hadn’t really understood their business.

But if you just want to test out a rough business idea, the Free Version might be all you need. It is a fully functional pro forma template for your startup projections. Enter your Capital Expenditures, Sales & Marketing and Operating Expenses, Personnel, Sales, Loans, and Investment, and you’ll instantly get your P&L, Cash Flow, and Balance Sheet.

Note: The Free Version is not the same as the paid versions. It’s completely different code. So it’s not designed to be an evaluation for the paid versions, which have far more functionality.

It will only take you a few minutes to see how your business idea pans out – and then make as many changes as you like and see how they affect your bottom line profit and cash flow.

To get your copy, just e-mail us at info@eznumbers.com.

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Important Patent Law Change

You may be aware of the Leahy-Smith America Invents Act.

Passed in 2011, and just going into effect last month on March 16, this law represents a sweeping change in American patent law.

From the beginning of patent law in the United States, we have operated under a “first to invent” system. Therefore even if someone else filed a patent before you, if you could somehow prove that you had not only come up with the idea (remember, no law anywhere on earth protects ideas alone) but a “reduction to practice,” then you would have grounds to invalidate the subsequent filing by the other party. Whether or not you would be able to afford the often drawn-out legal proceedings is another matter.

But now we are on a “first to file” basis, like much the rest of the world. This means that even if you invent something first, have meticulous inventor logs and other forms of proof of your primacy, if you do not file first, you will not get a patent.

This is widely seen as an advantage for large companies and patent trolls who can rifle off application after application. For many inventors and small business people, filing a patent is an expensive and drawn out proposition.

There are some interesting aspects to the law, including:

-If you have been using substantially the same invention for more than a year before the date of another party’s filing, you will still have the ability to continue exploiting the invention in the same way, with some limitations.
-The definition of prior art – previous disclosures which can prevent a patent from being granted or invalidate an existing patent, has been widened to include more international information.

This law is an important change to patent law, and it’s important that you be aware of it if you have any plans to file a patent now or in the future.

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