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VC Bootcamp: Why Boston is a Great Place to Launch

By Dave McLaughlin, CEO of VSnap

Recently The Capital Network presented its Venture Fast Track program, a one-day “boot camp” to prepare startups for success with venture capitalists and angel investors. So often I find that people with great ideas might be a little bit unsure whether they’re a good fit to plug into all the resources offered by organizations like The Capital Network, MassChallenge, Boston World Partnerships, Venture Café, and so many more. It’s important that people understand just how open this community is. If you have a hunger to start and grow something, just show up! You’ll be welcome.

At the Venture Fast Track, people commented on two big buckets of value: the info and the people.

Detailed Intelligence

There was an amazing volume of detailed intelligence shared by presenters. (You can click here to see the detailed agenda). This is one of the great things about being in Boston – all the specialized 411 that you need is available to you if you just dive in and start asking questions at events like this one.

Patrick Hayes is the Founder of Shopping Manager, a company that he describes as “managing a phenomenal grocery shopping experience for consumers.” For him, the most valuable part of the day was the in-depth discussion of Cap Tables and the dilution that founders and early-stage investors experience during follow-on financings.

Tonya C. Johnson is founder of Ancient Baker, a Jamaica Plain bakery that uses ancient grains and medicinal plants. For her too, the greatest takeaway was the incredible detail on all the intricacies of raising angel and venture capital.

Accessible Experts

My experience is that the Boston area has tons of super-knowledgeable people who are accessible and willing to share what they know to help someone else launch and grow their business. This forum definitely proved that out, and several of the attendees cited this aspect of the event as the greatest source of value

John Clark is President of Indivly, a startup that rewards viral content creators. He commented that “the open and honest feedback” was the most valuable aspect of the day.

Janine Franceschi is Founder of PAW, a service that helps affluent pet-toting travelers find luxury pet-friendly accommodations. She described the most valuable part of the day as the “direct access to individuals who have done it, lived it, and lived to tell about this crazy entrepreneurial ride we’re all on.”

Really Enjoyable

People all over the world are dying to learn the kind of information shared in this session. As a community, we shouldn’t forget that. And part of what’s so awesome is that sessions like this one make it really pleasant and enjoyable, like a social activity, to learn all this stuff. You leave feeling totally energized.

Aubrie Pagano, Founder & CEO of Zoora, which is a really cool online marketplace for designer custom clothing, talked about this. “I really enjoyed the small group setting and the opportunity to share a meal with investors. It was an intimate, casual way to be introduced.”

I found a lot of value in the nuanced dynamics of dialogue with venture investors in a role play negotiation acted out by Matt Witheiler of Flybridge Capital, who mock-invested in a company pitched by Matt Douglas, Founder & CEO of the event management service Punchbowl, based in Framingham. There’s no substitute for getting in a room and soaking this stuff up.

If you wish you’d known about this event earlier, well, don’t fret. Keep in mind that The Capital Network offers tons of events, all full of insight and modestly priced. It’s just one of the many resources in Greater Boston for people looking to launch!

Dave McLaughlin is CEO and Co-Founder of Vsnap. He is a member of The Capital Network’s Advisory Committee and a Board Member of Boston World Partnerships.

SAM HAMMAR NAMED EXECUTIVE DIRECTOR FOR THE CAPITAL NETWORK

FOR IMMEDIATE RELEASE

Contact: Meredith Childs

Phone 210-393-0547

Email [email protected]

WELLESLEY, Mass., April 2, 2012 — The Capital Network (TCN), Boston’s leading non-profit organization providing education and community to entrepreneurs and investors around funding for startups, today announced that Sam Hammar has joined the organization as Executive Director. Sam replaces Michelle Hipwood, who has joined TCN alumni company, ImmusanT, a venture backed biotechnology company, as Director of Finance and Operations.

“Under Michelle’s guidance, TCN has grown into an incredibly effective organization providing high quality programming and community to entrepreneurs, angel investors, venture capitalists and others in the entrepreneurship ecosystem”

said Jeremy Halpern, TCN Board Member, and a Partner at Nutter McClennen & Fish LLP “We believe that Sam will bring strong entrepreneurial energy, and a broadened strategic vision, as we continue to build an organization that can add tremendous value to startups raising capital at many different stages.”

Well known among entrepreneurs in Boston, Sam most recently spent four and a half years working for Mayor Menino’s Boston Redevelopment Authority (BRA) on the City’s Innovation District Initiative. She joined the BRA’s Economic Development team in late 2007 to market the City for business attraction and found herself helping craft the vision, strategy, and communications plan for the Innovation District upon its announcement by the Mayor in January 2010.

With a strong belief that the entrepreneurial community and its connectivity could drive the success of the area, Sam has built a global communications infrastructure that has seen a migration of companies to the District, supporting the vision of the agency. Since its inception, over 100 businesses and 3,000 employees have moved there.

Her passion for transparent and accessible organizations prompted her to advise several other City departments on revolutionizing the way they communicate with their constituencies.

“I am thrilled to be able to continue my work with Boston’s entrepreneurial community, helping startups actualize the vision for their companies,” said Sam. “The opportunity to drive The Capital Network’s next stage of growth is a natural extension of my passion around entrepreneurship, and I look forward to working with the community, the board and the organization’s tremendous sponsors to build on the great work that Michelle did as my predecessor.”

Sam holds an M.A. in Global Marketing Communications and Advertising from Emerson College and a B.A. in Political Science from the University of Florida. Before joining the City, Sam used her marketing and community engagement skills for fundraising at the American Cancer Society, teaching Social Activism at a Boston Public High School, and producing trade shows for The Merchandise Mart in Chicago.

About The Capital Network

The Capital Network provides the most comprehensive set of early-stage financing education, networking and resources available in New England. Through large breakfast roundtables, intimate deep-dive topic lunches, mentoring sessions, Fast Track Boot Camps, focused industry special events and networking receptions, The Capital Network connects New England’s premier entrepreneurs, angel investors, venture capitalists, corporate/strategic investors, government agencies, educational institutions, and area-expert service providers.

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Private Equity vs. Venture Capital: Finding the Capital That is Right for You

Jeremy Halpern is a Partner at Nutter McClennen & Fish and a TCN board member.

Venture Capital and Private Equity get a lot of media attention. Sometimes they are the “genius” talent scouts of the business world, investing into companies with astounding foresight. In other narratives, they are the ruthless capitalists, taking control of companies and ejecting management teams from the driver’s seat like carjackers. As it turns out, neither of these stories are very accurate.

Venture Capital and Private Equity firms are key components of the corporate finance landscape, offering growth capital and liquidity at critical moments in the evolution of companies when more traditional sources of cash, like banks or public markets, are unavailable or unwilling to invest. But like all professional investors, these firms have a job to perform on behalf of their limited partners. These firms survive their own torturous sales and diligence processes to convince pension funds, banks, universities, hedge funds, fund-to-funds, and other institutional investors that they will successfully earn returns superior to public indexes and other asset classes. This is no job for the faint of heart.

Interestingly, the differences between venture capitalists and private equity firms are often misunderstood, in part because some firms have both types of investment funds housed under the same umbrella. Publicly they are often treated as the same kinds of investors, where the only difference is the average deal size. The story goes that venture capital will put in a few million, but private equity will put in tens or hundreds of millions into companies. While average deal size is a critical differentiator between the two types of capital because of the implications for the fund structure and business model, it is by no means the only difference. I have worked on private equity deals as low as $4,000,000 and venture capital deals for greater than $50,000,000.

But the real issues are that, for the most part, they do not invest in the same kinds of companies. Primarily they differ when it comes to the stage of companies in which they invest, as well as the breadth of industries they will consider. In addition, they have differing requirements on total market size, likely return range, return horizon, technology risk appetite, market adoption risk, competitive environment, liquidity for founders, size of investor stake and whether a prospective portfolio needs a new disruptive technology or only potential for sustainable future cash flows.

Companies seeking capital from venture capital and private equity are well advised to first understand the priorities and goals of these firms, and to understand which might be a fit for their current needs. Once understood, crafting an investment deal that aligns the interests of all parties is not only possible, but usually provides benefits far superior than investments from banks, public markets or other sources of silent cash. Why? Because the premise of both kinds of firms is that outsized returns are the result of the human capital deployed by the firms into the investment. It is the venture capitalist and private equity teams that help move companies forward. As such, the very first job of any company seeking capital is to form relationships and to judge the quality of the humans involved. While firm level reputations are good general guides, they are absolutely no substitute for working with individual partners and teams at the investment firms to gauge whether these are the kind of investment and operational partners you want for years to come.

Equally, many growth or expansion stage companies often believe that obtaining fresh capital will solve all of their problems. While more cash can usually (but not always) accelerate operational goals, the wrong type or timing of new capital is often not in the best interests of current equity holders. A financing plan that articulates and balances the need and uses of cash with the resulting dilution and preferential treatment of the new money is critical. But that is the beginning of the analysis not the end. Companies and investors need to align on issues of control, leverage, management, culture, values and their operating relationship. Only after this courtship results in (mostly) true love will there be a venture capital or private equity deal that is right for you.

To learn more please join Jeremy Halpern, Partner, Nutter McClennen & Fish LLP, Matthew Witheiler, Principal, Flybridge Capital Partners and Geraldine Alias, Principal, North Bridge Growth Equity, at the XPX-Boston Roundtable on February 29, 2012: Unraveling the Mysteries of Venture Capital and Private Equity.

How Angels Can Make Your Company Better (Without Giving You Money)

Angel investors can be a Godsend… and not just because they can help fund your business. When we founded Mosaic, I spent a lot of time meeting with Angel investors and telling then about how my company helps photographer’s better access and store their photos. I did too much telling and not enough listening.

I was in full sales mode. I believed it was my job to convince them that Mosaic was a great investment and that together we were going to make boatloads of money. That was part of my job. But an even bigger part of my job was actually building Mosaic into a successful company.

Angel investors are really smart. A lot of them got their wings by building businesses themselves. They also get thrown more pitches than Kevin Youkilis.

I believe you should ask them for advice first and money second. If you start to hear the same types of questions from the investors, you have two options. 1) Go out and do research on the question and come back with answers. Ask them if this new data satisfies their question and if not what data would. 2) If the answer to their question isn’t good, then it is time to think about a pivot.

A pivot isn’t a bad thing. If you listened to your advisors early at the very least it will save you from a lot of wasted energy and resources. As a startup by definition you are trying to do a lot with few resources - so waste is evil. It might even save your business.

Balance your gut with what investors say. Be a harsh critic of your answers before you give them to potential investors. If you aren’t satisfied with your own answers to questions, neither will potential investors.

It is easy to get lazy with answers as being good enough. Quickly identify your startups fundamental business assumptions and figure out how you can test these assumptions as quickly (and cheaply) as possible. Angels bullshit meters are remarkably well tuned.

There is no right way to do any of this stuff. If you ask 20 Angel investors the same question, you will get 20 answers. The trick is to listen to all of them and figure out the right path for your business.

In this way, Angels are very similar to customers. Remarkably, investors and customers were giving us similar advice; it took us too long to realize this. Once we did, Mosaic started gaining customers more quickly and we had better luck with investors.

We were blessed with great mentors (many from The Capital Network) like Ben Littauer who saw our potential and worked with us to build a stronger business. (And yes, he ultimately invested.)

Ultimately if you listened to the investors needs and answered their questions, they will invest. I would rather err on the side of treating potential investors too much as advisors than too little. This might even slow down your fundraising efforts.

But even if those Angels don’t invest, you will have gained a lot.

About Gerard Murphy: Gerard is the CEO/Co-Founder of Mosaic Storage Systems. You can connect with him on Twitter or Google Plus.

Valuing a Start-up

This post originally appeared on Dan Allred’s personal blog. You can view the original post here.

I have had a lot of conversations lately with entrepreneurs about how to value their businesses. This is always an emotional topic but a very important one nonetheless. In this blog post, I will put forward three methods for valuing a start-up, all three of which I believe should come in to play for most businesses.

Method #1 - using financial metrics:

No duh, right? This is how you are supposed to value a business. This is the kind of stuff they teach in business school. When we look at public companies, we talk about their value in terms of their P/E ratio in an effort to collapse all companies into a common measurement where we can understand their value (price) relative to how much cash they generate on an annual basis (earnings).

However, start-ups do not have any E yet. Let alone earnings, they may not even have any revenue in the early days! Notwithstanding, it still makes sense to think about value relative to key financial metrics. I like to understand a company’s financial opportunity from both a tops down and bottoms up perspective. This is probably enough material for another blog post, but basically, entrepreneurs should be able to talk about their market opportunities from a tops down perspective and be able to demonstrate that they are attacking a large and growing market that is ripe for whatever disruption they are bringing into it. Likewise, they should be able to talk about their business strategy from a bottoms up perspective and demonstrate just how much of that market they will capture, when they will capture it, and at what level of gross margin. Tops down proves that the market is worth pursuing, and bottoms up is the litmus test that measures just how well the entrepreneur can pursue the market. The bottoms up approach should walk the thin line between ambition and realism, as entrepreneurs are so often required to do.

So, for early-stage ventures, valuing a company on financial metrics is almost always forward-looking. Looking backward to trailing revenues (as is common with traditional companies) is unattractive to the entrepreneur because an early-stage company is typically in hyper-growth mode. However, looking ahead is entirely subjective. There are two key considerations:

1) What is the likelihood that the forward-looking revenue can be attained? Answering this question demands an evaluation of the entrepreneur, the plan, the market conditions, the resources (i.e. cash, sales people, etc.) required to get the company to the sales milestone. The chief evaluator in this question is whoever is trying to value the company, most likely an investor or potential acquirer.

2) What type of multiple can be assigned to the forward-looking revenue? This is really a market driven metric and it ranges from as low as 2x in bad times to 10x+ in good times. Check around with other entrepreneurs or advisers (call me!) to check on this metric and how it is trending. Also, consider your gross margin, not just your top line revenue. It is a pet peeve of mine when gross margin is ignored. If your gross margins are low, it does not make sense to peg your value to a forward-looking revenue multiple, similar to what a company with high gross margins can get.

Admittedly, this is all very subjective, which is why it is so important for an entrepreneur to be able to articulate a plan to attack a large and growing market and also to incite confidence in others that he or she is the one to do the attacking.

Method #2 - using strategic metrics:

All of us in the start-up ecosystem love “strategic value” because it basically means that some companies are willing to pay well beyond what makes financial sense because the asset is so strategic to them. That is the positive side of strategic value. The negative side is that there is almost always a limited universe of players who will view the company in such a way.

As a result, strategic value is a great thing to leverage when selling your company, but it is a much harder thing to leverage when financing your company. Sure, entrepreneurs can bring in strategic investors to a round of financing, but they need to be well aware of the timing and impact of such a move, especially if it means that business opportunities with another strategic partner are limited as a result. If the entrepreneurial company’s strategic direction can remain open and unencumbered, then bringing in a strategic investor can be a great move.

Within the strategic value framework, especially with respect to acquisitions, there are three ways to think about assigning value:

1) Financial assets: you may hear this referred to as an “accretive” acquisition - i.e. one that has an immediate impact on the acquiring company’s bottom line. The valuation method here will be more similar to the financial metrics described above, although the acquiring company may think about costs they can strip out of the target business as well as scale they can achieve because of their established sales & marketing infrastructure, branding, etc.

2) Technology assets: oftentimes, the entrepreneurial company’s advantage is that it can develop technology and products faster and better than large companies. A “technology” sale proves that out as the superior technology of the smaller company becomes part of the product offering of the larger company. This can be a great outcome for an entrepreneurial team, especially if going to market would have been difficult for the smaller company due to cost, competitive pressure limiting access, etc. The valuation exercise here is to assess how much further investment is needed to prepare the technology for commercial success inside the larger company and then to weigh that cost against the financial upside (again using the financial valuation methods described above).

3) People assets: another key differentiator for entrepreneurial companies is their ability to attract intelligent and creative people who are excited to attack problems on the bleeding edge of the market. This is incredibly valuable to large companies as well, especially once the entrepreneurial teams have amassed market knowledge and domain expertise. Therefore, large companies will sometimes acquire companies to get access to their employees. This is especially true in times like this when hiring advanced engineers is difficult and competitive. One caveat: the acquirer is valuing the people much more than the company or the assets it owns (i.e. technology, products, etc.) and that is reflected in what they are willing to pay. These acquisitions are typically good for the employees (salary, bonus, long term incentives like stock options, etc.), but they are not as good for the shareholders (i.e. the acquirer is not really willing to pay up for the company’s stock).

Method #3 - using practical metrics:

Everything above needs to be tempered with a level of common sense and practicality. We are at a point in the market where certain companies - i.e. Facebook, Twitter, etc. - are able to raise money at astronomical valuations based on very forward looking multiples (in the case of Facebook) or highly differentiated strategic value (in the case of Twitter). Those kinds of extremes do not apply to 99% of entrepreneurial companies.

When entrepreneurs think about the value of their company, they need to consider the business objectives of those who are buying in. For example, when raising a round of venture capital financing, the venture investors need to own enough of the company to be incented to spend their time, continue to invest capital as needed, etc. and the need to buy in at a price where there is reasonable upside potential for them. This is the practical governor that kicks in when entrepreneurs think about valuing their companies, even when things are going great and the valuation methods described above point to a big number.

In summary, companies are ultimately valued on the cash they generate. Start-ups are not yet at a point where that is a reasonable metric, so valuation is an art more than a science, and the key in understanding value is to assess the likelihood of how much cash can be generated, when it can be generated and for whom (i.e. for the current company, for another company that may acquire it someday and for its investors). Beauty is undoubtedly in the eyes of the beholder, and the best entrepreneurs know how to paint the most attractive picture, accenting both their financial and strategic highlights, all while keeping practical considerations in mind.

Want to learn more? Join us next Wednesday January 25 for our Evening Roundtable: Negotiation and Valuation where you can test our your skills and see how they compare to the real thing as we walk through the Endeca story. More info

Holiday Greetings! (Tis the Season for Shameless Self Promotion)

We have enjoyed all of the holiday cards that have come our way this season. Below is an example of one of our favorites. Anyone who has started a company can relate to the company being more of a member of the family than anything else. Happy Holidays!

What is your favorite holiday card you’ve received this year?

____

Subject: Holiday Greetings (Tis the Season for Shameless Self Promotion)

Happy Holidays!

It’s the holiday season. Time for shameless self-promotion! We all do it…holiday cards about the new promotion at work, the kids excelling at school and sports, the vacations.

As an entrepreneur, you don’t get promotions and you don’t take vacations, so you have to talk about your business as if it’s your child.

This year, we conceived, delivered and got the kid into elementary school in under 10 months! Now we are pushing it to excel and expect it to be scoring the winning touchdown in the Super Bowl in the next 5 years. Yes, we are very overbearing parents.

Let me explain (*Yes, the email looks long, but it is worth the read)

AI Exchange, Inc. officially launched in February 2011. We have two subsidiaries: AI Advisors, LLC and AI Exchange Technologies, LLC. AI Advisors is a Registered Investment Advisor and AI Exchange Technologies provides the technology for our platform. We closed a venture funding round in September led by General Catalyst and Common Angels.

Hands out Cigars

So, what makes our kid so special? Our child makes the World of Investments a better place. The World of Investments has been bullied by the elite for too long. If you want access to better risk adjusted returns, then you better hand over millions in lunch money, suffer a wedgie or two, and possibly a swirly. Don’t even try to sit with the elite at the lunch table.

But, along comes our kid who makes everyone around them want to cooperate better. In our World, the kids all sit together, they are open and honest with each other, and they have good manners and sportsmanship. This never would have happened without our little AI Exchange.

Are you sure your kid isn’t named Tim Tebow?

Trust me, someday Tim Tebow might even be singing the praises of AI Exchange. AI Exchange facilitates the relationship between long/short equity managers (the cool kids) and investors (us). Specifically, AI Advisors trades long/short equity strategies directly in the client account using the software developed by AI Exchange Technologies. For example, if you have an account at Schwab or Fidelity, you will see the hedged equity strategy tactically being traded right in your account. This is like AI Exchange driving the cool kid to your house to teach you and your kids how to be cool….for free.

Free!

This is a business model that provides numerous benefits to investors and their advisors. The investor maintains custody or their assets, has daily liquidity, full transparency, and can invest at much lower minimums. We don’t even charge the investor for this service. Pretty cool, right?

Wow…that sounds like something even Barney Frank could support!

Historically, an investment advisor would advise clients that hedge funds, by nature, are risky. “Stay away. Don’t go near that kid. I don’t care how cool he looks.” Much of this was apparent in 2008. Investors could not access their capital, they had no idea what was being traded (Madoff), and many funds lost tremendous amounts of value due to excess leverage.

Thanks for the advice. ..I’ll just eat much lunch over here in peace and quiet.

However, long/short equity strategies often improve portfolio risk adjusted returns. There is a good-side to the cool kid, and we need to get to know it. Large institutions have been sitting with the cool kids and using long/short equity strategies for their benefit for years. If it’s working for Harvard and Yale, then maybe it should work for everyone.

Occupy Harvard Yard!

Wait, we’re not quite the 99% yet. Typically, an investor would need to invest $1 million or more in a hedge fund, but our minimums for a separately managed account are $100,000. There is still a “Qualified” investor requirement for strategies that charge a performance fee, but we do have one strategy that does not charge a performance fee and is eligible for retirement accounts. I guess our school is a bit more like an expensive boarding school than a public school, but at least the kids are all playing nicely.

Wait…there’s more!

Well, not really. That’s pretty much it. We have a team of 6 great employees that you can read about on our website www.ai-advisors.com. Since AI Exchange sits behind the scenes, we don’t really have any pictures to share, but we do have an animated video that you might find entertaining. Additionally, I can send you the manager profiles if you are interested in learning more about the strategies we offer.

As you know, it takes a village to raise a business. There has never been an entrepreneur who created success and value without the support of their friends. Thanks to everyone for your support, your feedback and your encouragement.

And, if you know anyone who might be interested in learning how to be cool…please send them my way. My kid needs new friends.

Happy Holidays!

Charlie

Co-founder and CIO, AI Exchange

AI Exchange is Winner of the New England 2011 HBS Alumni New Venture Contest

The One Minute Pitch

You are at a holiday party and go to get yourself a drink from the bar, and there, right next to you waiting for a glass of wine is that one magical person that you have been dying to get an intro to for months. You realize that you only have until his drink is poured to hook him in, what do you do? Tackle bartender and spill all the wine, so you can have more than 30 seconds to talk? I hope not.

This is why it’s important to always be ready with that quick, short, to the point pitch of who you and your company are (and why you are awesome).

As passionate as entrepreneurs can get about their ideas and their business it is often surprising how hard the one-minute pitch is. I say this both as someone who has given plenty and heard plenty. I wear multiple hats as someone who helps entrepreneurs at The Capital Network, and someone who is marketing a new business at Textaurant. So I know from both sides of the coin why the one minute pitch is both difficult yet crucial.

It is always frustrating to have a very excited entrepreneur come and share their idea with me and after the first minute of our discussion I’m still completely confused as to what the product is or even how they will make money.

In the beginning when I started working with Textaurant I had a very hard time condensing what we did into a few sentences that both made it perfectly clear who we are and what we do, but also that didn’t make people get that glazed look of boredom in their eye. The passion and excitement that I felt about our company and product made it easy for me to go on and on for quite a while about why we are changing the way people wait and how everyone should use our technology, but that passion also made it hard to sum up in a few short sentences.

Our founder Josh would tell me over and over what he said and I would try to remember it perfectly I would always mess it up or stumble. The way that I finally got it down was when Josh handed me an iPad to demo at a networking event and pushed me into the crowd. “Don’t come back until you’ve spoken to everyone”

Two hours and who knows how many unsuspecting people later I finally had it! Every person I talked to would ask a different question after I explained who we were and I used that to fine tune my next pitch adjusting my pitch based on what I was realizing were the key aspects other people were picking up on, which might be slightly different than what I had originally thought.

Depending on who you are talking to, what your company is and how complicated it is, there will be different things to focus on, but if you are just sitting down to plan your first attempt at a one minute pitch there are three main points that can guide you through:

1. Who are you?

Introduce yourself. Don’t give a whole long life story, nobody needs to know that you were born in the rain on a Tuesday, but they do want to know your name at the very least.

2. What do you and your company do?

Yes, I know it’s obvious, but if you don’t get this out after the first few words you will lose everyone. You should be able to some up the big picture of what you and your company do in one clear sentence. The following sentences just expand on the overall picture of what you do.

3. Why are you different?

Why is your idea so important and different than any other option out there. This shouldn’t be a total break down of the competitor matrix you have on your desk, but should at least give the listener and idea of that “wow” factor behind your business that makes it so great.

Once you have the basic script figure out, throw it away. The last thing you want to do is memorize it word for word and sound canned. You will never say the same thing twice, and that is ok.

The most important thing to do is practice. Practice on someone who knows very little about what you do, especially if you have a highly technical or complicated product. Give your pitch, pay attention to what people ask you after. If people are asking you things that seemed like they should be obvious, that is usually a good indicator that the obvious, isn’t really that obvious.

The more you talk to people about what you do, the better you will get at explaining it. Never stop practicing.

Next Friday, December 16 The Capital Network is teaming up with MassInno and LaunchPad for an interactive Pitch Practice and competition event. You will get to work one on one with LaunchPad members to practice your pitch and hear feedback. The company with the best pitch will win a $100 gift card, just in time for holiday shopping! More Info

Relay Technology Management Announces Partnership with Nature Publishing Group

A recent TCN alumni, Relay Technology Management has announced a collaborative partnership with Nature Publishing Group (NPG). Relay are building a unique software platform that will provide next generation predictive analytics to the transactional licensing markets in the biotechnology and pharmaceutical industry. The partnership will allow Relay to leverage Nature’s resources and content to sell their SAS platform to biotech and pharma companies.

I spoke with Dave Greenwald about this partnership and how TCN helped them get to where they are today. Dave participated in our Venture Coaching program as well as our regular programing with a season pass.

” TCN has been supportive of Relay since we won the Tufts Business Plan competition in 2008. Through the competition we received a free season pass and took full advantage and attended lots of the events.” - Dave Greenwald, Ph.D. CEO and Co-founder of Relay Technology Management, Inc.

One of the major benefits that TCN was able to provide was to introduce Dave to Jeff Arnold. Jeff was able to give lots of personal insight and advice to Dave which really helped them along in their business.

“TCN has helped us be a higher quality company and has helped us be more attractive to investors and other programs” - Dave

The software product is being launched in the 1^st half of next year and Relay are currently working with 2 of top 10 pharma companies. They want to work with other biotech and pharma companies. Currently the company is in beta testing.

Click here for a copy of the full press release.

Life Science Venture Fast Track Recap

Earlier this week life science entrepreneurs and life science professionals all gathered at Nutter McClennen and Fish for a half-day bootcamp that was an intense study of everything a life science company needs to know to get started in business.

Topics ranged from building the business model to protecting your IP. For a taste of what our Venture Fast Tracks are like you can see the short video clip below. In the spring we will be hosting another Venture Fast Track that focuses on all high growth startups.

Are you a life science company and missed out on the Fast Track? Join us next week for Accounting 101 for Life Science Companies hosted by Moody Famiglietti & Andronico in Nutter’s offices.

Building financial plans - tops down or bottoms up?

This was originally posted on Dan Allred’s blog Volume Game. You can view the original post here.

I look at lots of financial plans, and I often help entrepreneurs think through their financial modeling. One of the questions I get a lot is whether a financial plan should be based on a tops down analysis or a bottoms up analysis.

In my experience, a bottoms up analysis is much more valuable when it comes to operating a business and checking the vital signs of a business such as progress versus plan, performance to expectations, hitting key performance indicators, etc.

That said, you need to do a tops down analysis as well, but that analysis should be a quick exercise to help determine which markets are attractive to your business.

Here’s how I think about building a financial plan:

Step 1: Conduct a tops down analysis of the market where you intend to do business. This analysis should tell you whether the market is attractive enough - i.e. big enough, dynamic enough, etc. - for you to pursue it.

Step 2: Assuming the market is attractive enough for you, build a bottoms up financial plan that illustrates what your penetration of this market will look like - from the perspective of both revenue and expenses.

A good bottoms up financial model is the reality check to the excitement that comes from a tops down analysis of a really attractive market. More than that, it is a management tool for your business because it forces you to think through the performance metrics that will be key value drivers for your business.

Let’s take a look at what it looks like to build and use financial models in the way I describe above.

Tops Down Analysis

A tops down analysis typically starts with an estimation of how much money is spent in a particular industry on an annual basis. This information can be gathered from analysts such as Gartner and IDG or from industry trade groups.

These figures often include practically everything spent within an industry, although they are more helpful approximations of the true attractiveness of a market when they can be narrowed to the market segment that is directly relevant to the product or service that you are developing. It makes sense to spend some time on this because 1) better analysis of the data is going to be helpful to you as you think about your financial and marketing plans, and 2) prospective partners, investors, etc. are going to challenge you on your assumptions about the market.

Many businesses are targeting multiple markets and therefore need to conduct this exercise several times over. The results will be helpful as you begin to build a bottoms up model as it will help you prioritize markets and decide how to deploy your finite resources to attack each market.

Bottoms Up Analysis

The key to the bottoms up analysis is the assumptions you make as you build the model. Think of a bottoms up model as building a house. You make some key assumptions about customers - how long will it take to close a customer, how much will each customer spend with you, how long will you keep them, etc. - and these assumptions lay the foundation of the house. These assumptions really drive the model as they drive the revenue build, which is probably the primary long-term value-driver in your business (along with profitability). You also make some assumptions about how you will attract and convert these customers. Think of these as the walls of your house, what people see when they look at your company. These sales & marketing assumptions will help build out the expense portion of your bottoms up model. Finally, you need keep your house safe and make it livable for your employees, shareholders and customers, so you need to invest in IT systems, financial oversight, legal counsel, human resources, insurance, etc. These general & administrative expenses are like the roof and plumbing of your house - not the parts you spend a lot of time thinking about but very important nonetheless.

Here is some advice on how to think through each assumption category:

Revenue assumptions
- Think about the types of customers you have and build an assumption case for each type of customer.
- Think about the products that you have and how they are priced. Which products are each class of customers most likely to buy, will you be able to upgrade them to higher priced products or sell them additional products? If so, when?
- How long will you realistically keep these customers? How much money will you make on them over that time period - subscription revenue, maintenance revenue, upgrades, upsells, cross-sells, etc.?
- How much does it cost you to deliver your products and/or services to your customers? Factor in any variable cost into this section of your bottoms up plan as cost of goods sold (COGS). These would be expenses such as material costs, implementation costs, customization of software, etc.
- Are there network effects or other inflection points in your business that allow you to either charge more or deliver your product at lower cost? If so, make sure you build those revenue enhancements and efficiencies into your plan as you achieve the relevant milestones (probably closely related to a certain number of customers).

Sales & marketing assumptions
- Lots to think about here. Most fundamentally, how do you sell your product: direct sales, inside sales, ecommerce, channel sales, OEM, etc.? The answer to this question has significant bearing on the assumptions you make here as it affects how you market your product, who you employ to sell the product and how much cost is associated with each of those employees.
- Think about your sales funnel and relate it to the assumptions you made above about the number of customers you plan to attain. For each of those customers, how many sales people need to be involved and over what period of time? And how many other potential customers do they need to talk to in order to land one - i.e. what is their realistic conversion rate?
- In a somewhat related assumption, how long does it take a new salesperson to come up to speed before the assumptions you made above about their effectiveness is relevant? Factor that in.
- Where do all of these prospective customers come from - i.e. what does the very top of your sales funnel look like? If you have a channel strategy, how do you develop this channel and what costs are associated with that? If you have an inside sales force, how do you generate leads for them to pursue - inbound marketing, SEO, SEM, etc. What costs are associated with this? If you have a direct sales force, then chances are you have a more complex sale with a longer sales cycle, not to mention more expensive sales people, so factor this in.
- Building out this portion of your bottoms up model should be a good exercise for you and your team. This is a reality check for both the revenue assumptions you’ve made as well as the tops down analysis you completed. This bottoms up plan should give you a blueprint for how you will attack the market and what kind of resources you will need to do so.

General & administrative assumptions
- This should be a small portion of the expenses for an early-stage company and will grow over time as the business becomes more complex, requires more oversight, third party opinions, etc.
- Think about the systems, services, policies, etc. that you need and ask around to get an idea of the cost assumptions you need to make around these items. Our market has many great resources for outsourced G&A services, such as finance, accounting, human resources, etc. Taking advantage of these resources will help you get experienced people on your side without committing to the expense of full-time employees. There are also many service providers , such as attorneys, bankers, real estate advisors, etc., who are accustomed to working with start-ups and willing to tailor their services, fees, etc. to the needs of a start-up with an understanding that they will grow into a more traditional relationship as your business scales. So ask around (and ask me)!

In my estimation, your bottoms up model will require at least 15-20 times the effort of your tops down analysis, but it will add real value to your business. If done properly, a bottoms up analysis will tell you: 1) how much capital your business requires in order to reach the revenue & profitability objectives in your plan, and 2) how to manage your business according to the key metrics that drive value in your business, as you would have thought about all of these metrics up front when you made your assumptions.

Dan Allred is a Senior Relationship Manager at Silicon Valley Bank. To hear more from SVB professionals check out our Expert Lunch hosted by Silicon Valley Bank on Debt Financing Options.