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May 17th, 2012 VCs are good at asking questions. They are unimplicated in your dumb decisions, unmoved by your original sense of mission and far less concerned than you that a blunder could bankrupt you. They re-imagine your business in terms of all the other businesses they’ve seen, pulling the arms off one doll and the head off another to create a perfect money-making Frankenstein. And since the stakes are high, the whole philosophical exercise tends to result in action.
Here are the questions VCs asked Redfin that changed how we think about our business.
1. What’s your deadly sin? Sequoia’s Roelof Botha
. . . → Read More: The Eight Best Questions We Got While Raising Venture Capital
May 16th, 2012 This is a follow-up to my post A simulation of angel investing.
Several readers commented on Hacker News that my first stab at a simulation was misleading because it showed negative average returns for low deal sizes, when in fact expected returns should be not only positive but constant regardless of deal size.
They are right.
I had been using payoff as the random variable, but rate of return as the measured variable. The formula for rate of return (x^(1/t)-1) places the most weight on the zero-payoff case (where return = -1.0), so the simulation results were skewed towards negative
. . . → Read More: A Simulation of Angel Investing, Part 2
May 16th, 2012 In angel investing, it’s the extreme distribution of payoffs that keeps things interesting.
If anything, it resembles buying a deep out-of-the-money call option, but with nonlinearity. If you win big you might find yourself in on the ground floor of the next Google or Facebook. That’s incredibly unlikely, but still possible.
More likely, you’ll end up with a solid 2x-5x return from a startup that grows into a viable long-term business. But most likely of all–by a long shot–you’ll lose your entire investment in another failed startup.
The most successful angels invest in a long series of deals over many
. . . → Read More: A Simulation of Angel Investing
May 16th, 2012 One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, “it’s just another way to lower the price”.
I’ll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I’ll explain.
But first, let me lay out a few things for those who aren’t well versed in these matters. The
. . . → Read More: Valuation and Option Pool — Understand the trade off
May 16th, 2012 I just returned from the 2011 Angel Capital Association Summit in Boston, April 4-6, 2011. It was attended by over 500 angels and associates, including about 60 international angel leaders. It was an excellent meeting – the best yet of the half-dozen or so US ACA angel Summits to date. On Wednesday afternoon, I was fortunate to be asked to facilitate a roundtable discussion entitled: “Valuation of Pre-Revenue Companies and Irrational Exuberance” attended by 50 or so delegates. We reviewed the following chart based on an informal survey I conducted last summer: 2010 Angel Valuation Survey
. . . → Read More: Current Pre-money Valuations of Pre-revenue Companies
May 16th, 2012 While vesting is a simple concept, it can have profound and unexpected implications. Typically, stock and options will vest over four years – which means that you have to be around for four years to own all of your stock or options (for the rest of this post, I’ll simply refer to the equity as “stock” although exactly the same logic applies to options.) If you leave the company earlier than the four year period, the vesting formula applies and you only get a percentage of your stock. As a result, many entrepreneurs view vesting as a way for VCs
. . . → Read More: Term Sheet — Vesting, Single and Double Trigger Acceleration
May 15th, 2012 Options and restricted stock in a startup are subject to vesting. This is done to associate the rewards of equity ownership with the time and effort put into creating value for the company.
Although vesting schedules can be infinitely flexible in theory, in practice they don’t vary that much. You’ll find that the majority of option plans and restricted stock agreements are identical in meaning and vary slightly with how vesting is structured. Most vesting schedules have the following parameters:
Vesting period. This is the expected period for full vesting. It is typically 4 years (48mos) in the case of
. . . → Read More: Vesting Calculator for Restricted Stock and Stock Options
May 15th, 2012 Every investor approaches due diligence differently. Some angel investors may request information in a detailed manner all at once, while others may simply request information at different times or stages. Regardless of an investor’s method to obtain information on a potential company, it is a proven fact that exercising thorough due diligence is indicative of more profitable returns. The following documents may be requested in due diligence.
General Corporate Materials These documents include:
The company’s articles of Incorporation (and all amendments) bylaws (and all amendments), minute book (including all minutes and resolutions of shareholders and directors, executive committees, and other
. . . → Read More: Due Diligence Checklist – Angel Investors
May 15th, 2012 Many VC websites have a tab that will tell you that you can submit your business plans to enquiries@vc_company.com or some similar generic email address. But does it really work?
Can you really send your business plan over the transom and expect to get a positive response? The short answer is “no” – don’t waste your time.
I know some VCs would take issue with this and somehow I’m sure that there are some success stories with this method but trust me this is worst way to approach a VC.
Why is it a bad idea? Most VC firms receive
. . . → Read More: Getting Access to the Old Boys’ Club (how to approach a VC)
May 10th, 2012 Massolution defines four categories of crowdfunding platforms (CFPs) Equity-based crowdfunding Lending-based crowdfunding Reward-based crowdfunding Donation-based crowdfunding Our survey respondents were asked more than 30 detailed questions relating to the participants on their platforms, the functionality of their platforms and their fundraising activities for the calendar years 2009, 2010 and 2011. Further datawas gathered via direct communications with 135 CFPs and significant secondary research. The survey was conducted under strict non-disclosure rules; hence all the data in this report is aggregated or averaged. Our research identified that nearly US$1.5B was raised by crowdfunding platforms globally in 2011. The participating CFPs represent
. . . → Read More: CROWDFUNDING INDUSTRY REPORT (ABRIDGED VERSION): Market Trends, Composition and Crowdfunding Platforms
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