Friends & Family

Customer Crowdfunding: Not So Fast, Entrepreneurs

Wil Schroter is the co-founder and CEO of Fundable.com which is a crowdfunding platform for startups, so it is not entirely surprising that he would pen a very pro-crowdfunding piece in GigaOM recently. In the piece, he righty calls out a few of the advantages: customer-sourced funding does allow you to test the market before you build, [...]

Early Stage Capital for CleanTech Companies in New England

When should a startup cleantech company use angel investors, venture capital, or government funding when seeking early stage funding? TCN’s recent special evening event focused on this topic, with over 100 entrepreneurs attending and a panel of speakers including Philip Guidice, the Commissioner of the Massachusetts Department of Energy Resources, David Kopans, co-founder and CFO of EnergyClimate Solutions , Dave Power, president of Power Strategy, and Bard Salmon, chairman of the board of Perillon Software.

General consensus among the panel was that that venture capital is not the best place to seek funding for clean technology. As summarized by Bard Salmon, CleanTech is the new “.com”, and most venture capitalists are looking at the industry as a new opportunity to have in their portfolio. There is a general lack of experience among venture capitalist groups regarding the cleantech industry. While there are some venture capital groups that do attempt to specialize in a specific aspect of cleantech, the panel generally seemed to advise against venture capital for early stage funding. As a general rule of thumb, Bard Salmon advises to seek venture capital only when the total money needed for the business is greater than $5 million dollars.

David Kopans suggested the following steps when considering angel funding for your firm:

• Invest as much as your own money as possible in the idea. Then turn to your parents, then college friends, then friends of friends who may be interested in your idea, and finally angel groups. Bootstrapping is essential to this strategy. By investing as much of yourself in your idea as you can in terms of time and money, you create credibility for potential investors.
• Cut your business into milestones. Outline specific value creation steps for you business, no matter how small, and decide who will fund your business at each milestone. This is especially helpful with angels who are worried about dilution of their ownership when you seek further funding. By outlining this beforehand, angel investors will know what to expect at each stage of your business.

As far as available government funding opportunities for cleantech companies, Philip Guidice, discussed that finding new energy sources is a high priority in Massachusetts as well as Washington right now. He cautions however that government funding should not be an entrepreneur’s main source when seeking funding. Working with the government will help more with credibility, testing, and market opportunities, as well as creating credibility for newly developing companies. One great resource is the Massachusetts Clean Energy Center that provides small amounts of funding to entrepreneurs by matching their current fundraising.

Any additional advice on cleantech early stage financing? Feel free to post your comments here.

Raising Financing for Startups from last week’s Venture Fast Track

About 80 entrepreneurs, early stage VCs and angel investors came to Nutter McClennen & Fish’s Seaport office last week for The Capital Network’s first Venture Fast Track Boot Camp. The theme of the interactive FastTrack was to give entrepreneurs an in-depth understanding of what it takes to raise early stage capital for a startup company.

In the audience were folks like Read McCarty, founder of Sandbox Medical (a provider of neonatal feeding solutions), Farnaz Bakhtari, Founder of TrainingPal (a SaaS based solution for the personal training and physical therapy markets), and Robin Coxe, founder of Close-Haul Communications (a developer of cellular over IP hotspots). Attendees included companies in the biotech, medical equipment, SaaS, cleantech, mobile, enterprise software, and other high growth fields.

In addition, fellow TCN Venture Coaching Graduates attended to share their success, such as Bettina Hein of Pixability and Joshua Herzig-Marx of Incentive Targeting. The group was joined by active Angels and VCs such as Jean Hammond of Launchpad and GoldenSeeds, David Beisel, of Venrock Capital, Jon Lim, of Polaris Ventures and the Polaris Dogpatch, Chris Sheehan, of Common Angels, and Elon Boms of Launch Capital.

The day started with keynote speaker Eric Paley, Managing Partner of Founder Collective, who discussed the current state of early-stage financing and the importance of leveraging the “network of trust”. Eric’s inspiring story focused on what to do when you are ready for financing, but it isn’t forthcoming. He illustrated the importance of building a strong Board and an active advisory group that were not just “window dressing.”

Some tidbits of advice gleamed from several of our sessions include:

On Creating a Business Model & Financing Plan moderated by George Simmons of Launchpad Venture Group & Yumin Choi of HLM Venture Partners:

• Lack of a consistent CEO is one of the biggest mistakes a start-up company makes. Founders should ask themselves honestly: Am I the right person to take my company from idea to exit?
• Would you rather be “rich” or be “king/queen”. Would I rather own 6% of a $100 million dollar company, or 100% of a lifestyle company?
• Fundable companies have large markets, create valuable solutions for critical customer problems, create barriers to entry for competitors, and have a well rounded “A” team.
• Most common mistake in looking at your financials? Entrepreneurs focusing only on top/bottom line. Learn to appreciate the value of gross margins, compare yours to your industry and know why your gross margin is higher/lower than others.
• Capital efficiency is critical to determining your financing needs.

On Raising Money from Friends & Families, Angels & VCs led by Jean Hammond, of Hub Angels, Launchpad Venture Group, and Golden Seeds, Carl Stjernfeldt of Castile Ventures, Joshua Herzig-Marx of Incentive Targeting, and Alex Golvsky of Nutter McClennen & Fish:

• When pitching your idea to an investor, even if the investor is not a good fit, ask if you can pitch to get advice.
• When going to friends and family for money, always write it down.
• When looking for angel group funding, find an internal champion.
• Always perform due diligence on your investor to see if they are good match — by stage, size, return profile, exit timing, interests and strategy.
• Some companies are a better fit than others for a particular type of capital. Figure out if you are a best fit with venture capital, angel capital, strategic capital, debt capital or bootstrap financing.
• Consider who an investor’s competitors are — because you may not be able to get funding from their competitors later.

On Dilution & Founder Equity Issues, led by Jeremy Halpern, of Evolution Advisors:

• Entrepreneurs should model the dilution impact of early stage investment – and understand exactly how this will affect the ultimate distribution of proceeds from a downstream sale of the company.
• The last investor is the most senior investor, which means last money in, is first money out.
• Participating preferred stock makes a deal significantly more investor friendly.
  If you pair strong valuations with strong anti-dilution measures, subsequent downround financings can radically diminish a founder’s equity value.
• Founders will typically take 100% of the dilution impact from an option pool that is adopted as part of the financing. If you are raising 12 months worth of cash, the option pool will need to cover the Company’s compensation needs for such 12 month period. This is just a fancy way of decreasing the pre-money valuation.

On Pitching the Plan led by Jeremy Halpern, of Evolution Advisors, Yumin Choi of HLM Venture Partners, and Jeffrey Arnold of Boston Harbor Angels and Mass Med Angels:

• When pitching investors, first appeal to their greed, then address their fears, then make sure they think you are a good use of their time.
• Successfully raising capital starts and stops with establishing your credibility – are you honest about the opportunity, risks and problems, and do you appropriately blend passion, humility and confidence.
• Investors invest in people because businesses don’t make things happen, people do.
• Focus on the value proposition and the market – not the technology
• If you can’t present your opportunity, solution, market, value proposition, competitive advantage, business model and team in less than 15 slides – you don’t know your business.
• Powerpoint slides are not the presentation – they are illustration – YOU are the presentation

On Angel & Venture Term Sheets and Negotiation/Valuation led by Bob Creeden, of Partners Innovation Fund, Jean Hammond,of Hub Angels, Launchpad Venture Group, and Golden Seeds, Jon Lim, of Polaris Ventures, Jeffrey Arnold of Boston Harbor Angels and Mass Med Angels, and Michelle Basil, of Nutter McClennen & Fish:

• It is important to pick your battles, not all terms are worth arguing over. Find the and focus on the key terms that are important to you.
• Understand how participation or multiple liquidation preferences change the economics of the deal
• Control over the board and the timing of selling the company is a critical issue
• Covenants and other rights of the Preferred investors can mean that even a minority investment will exercise significant control over the operation of the business
• Will you require the investors to pay-to-play – to support the company in subsequent financings or lose their preferred status and rights
• Valuations are driven by stage, leverage, the venture’s underlying competitive advantage and the ability to drive revenue
• Traditional valuation methodologies do not work for high risk, early stage companies — investors are trying to understand what their percentage of ultimate sale proceeds will be – and whether that is a good return on their investment.

Participants found the sessions very helpful, unlike any other all-day program with concrete takeaway material, a Mentor lunch session and a chance to meet with a high quality group of similar entrepreneurs. Tim Noetzel, founder of Pintley.com (an online community for the craft and micro beer industries), called it, “the most helpful and comprehensive program on early stage fundraising I ever attended.”

Let us know your thoughts on some of the above topics. We’d love to hear from you!