Getting Funded

By Ryan Gorman, Senior Manager at Wolf & Company, P.C.

‘Tis the season to be jolly, right? The holidays are fast approaching and with it comes an overload of food, family, friends and fun… at least for most people. For a few too many of us in the start-up world, the Holidays are just a reminder of the Grinch counting down the days until yearend close and your yearend audit. If you’re reading this post, you most likely know all too well the stresses associated with yearend. Here are a few tips from TCN sponsor Wolf & Company P.C. to ease your anxiety as yearend approaches:

Be proactive
Last minute Holiday shopper? Don’t be! Get your information request list from your audit team as soon as possible. It’s better to prepare ahead then cram it all in the night before. Keep in mind that many of the items on the information request list can be prepared well ahead of time. Also, ensure your accountants are aware of any significant transactions during the year or any significant changes to your business.

Dust off last year’s management letter
Last year you may have received a holiday gift from your accountants… an internal control deficiency letter! Much like the sweater your crazy Aunt Elma gave you; it went into the bottom drawer and hasn’t been seen since. Well, it’s time to open that bottom drawer, dust off the letter and get moving. Address each of those items before the end of the year to avoid any repeat comments. Call your accountants for ideas on best practices for implementation. Addressing those comments now will make you look like a hero later (unless of course you’re wearing Aunt Elma’s sweater).

Anticipate pain points
Getting scrutinized doesn’t just happen around the dinner table. Avoiding scrutiny from your family and friends is about as easy as avoiding scrutiny during your yearend audit. Anticipating these areas is one way to ensure you are prepared. Focus in on areas of significant judgment and estimates. Review your allowance for doubtful accounts based on your current receivable portfolio. Review for the necessity of any inventory reserves for items selling at a loss, damaged goods or slow-moving items. If you have significant goodwill or intangible assets, review your projections for next year and ensure they are reasonable and achievable.

Avoid last minute surprises
Surprise…. The in-laws dropped in for an extended visit. Fantastic! As much as we want to help our clients out, you are on your own on that one. What we can help you with is to avoid any last minute audit surprises. Is there any new accounting guidance that impacts your organization? Call your accountants and discuss it with them before yearend. Do you have to comply with any debt covenants? If so, perform preliminary calculations to know whether you are in compliance. Do you have any new reporting requirements or deadlines? Review all new agreements and provide copies to your accountants. Now is the time to take a look at these areas to avoid the headaches down the road.

The Capital Network and Wolf & Co want to wish you a happy holiday season full of cheer, and not fear! If you’d like to hear more ideas on how to make your yearend audit less fearful, contact Wolf & Co, a long-time TCN sponsor and high quality accounting firm.

Wolf & Co. Technology Services Team:
Scott Goodwin: 617-428-5407
Ryan Gorman: 617-428-5482

Over 130 women (and a few men) attended last week’s second annual TCN Women’s Entrepreneurship Breakfast to discuss how to increase the success of entrepreneurial women in high growth startups.

Janet Kraus, Co-Founder and CEO of Spire and Entrepreneur-in-Residence at Harvard, proved to be an engaging and insightful moderator of the panel, which featured Diane Hessan, President and CEO of Communispace, and Rudina Seseri, Principal at Fairhaven Capital.

We know that women are launching high growth startups more than ever. Yet even in Boston, an entrepreneurial hot bed, companies lead by women don’t seem to aim as high or clear as many hurdles. TCN and Boston’s entrepreneurial community organized a breakfast event at Microsoft’s NERD Center on December 1^st to focus on the challenges around women’s entrepreneurship in Greater Boston.

So what does the landscape look like? We know that women are more efficient, have fewer failures, submit more patents, and are heavily involved in IPO’s. But is not all sunny: there still very few female investors, while women take on less capital than men. How many women are actually starting companies, and what are the successes they’ve celebrated and the challenges they’ve faced? What are the hurdles that women continue to face in starting high growth companies? Here are some statistics and questions to consider, taken from the opening presentation from the Women’s Breakfast.

1. There are currently 8 million U.S. businesses that are owned by a majority of women. If U.S.-based women-owned businesses were their own country, they would have the fifth largest GDP in the world, trailing closely behind Germany, and ahead of countries like France, the United Kingdom, and Italy.
2. It pays to be in Massachusetts! Nationally, women make up 8% of all company founders; in Massachusetts, women make up 27% of founders. Massachusetts has the highest rate of female founders in the country.
3. Between 1997 and 2004, the number of women-owned companies grew by 28.1%. That’s nearly three times the rate of all privately held businesses with employees.
4. The average venture-backed company run by women has 12% higher revenues than the average of those run by men but, on average, 33% less capital committed.
5. In 1988, 4% of the 134 firms that went public in the US had women in top management positions. In 2009, all but two of the 19 high-tech IPOs had at least one woman officer.
6. Women-led companies with more than $1 million in revenue are twice as likely as male-led companies to get debt capital rather than equity capital.
7. Only 8% of entrepreneurs backed by venture capital are women.
8. Angel groups are actively working to promote women entrepreneurs through the formation of groups focusing on women-led companies, such as Golden Seeds and Illuminate Ventures, and through the syndication of deals from these groups with other angels.
9. Women now represent just over 15% of angel investors, but only 5-7% of partner-level high-tech venture capitalists in the U.S. Firms with women investment partners are 70% more likely to lead an investment in a woman entrepreneur than those with only male partners.

Read more:

• CB Insights, tracking of 165 internet companies and their 300+ founders receiving Seed or Series A funding from VCs from Jan to June 2010
• The End of Men by Hanna Rosin in The Atlantic, July/Aug 2010
• “High Performance Entrepreneurs: Women in High Tech,” performed by a team led by founder and CEO Cindy Padnos of Illuminate Ventures
• “Where Are All the Women” Resource List by Mass Challenge

With these statistics behind us, why don’t women ask for external funding at the same rate as men? Is there still a difference between women and men when it comes to the entrepreneurial path?

There are many resources in New England to help women develop high growth companies:

• Astia
• Babson College’s Center for Women’s Leadership
• The Boston Club
• Boston Women in Finance, Inc.
• Center for Women & Enterprise
• The Commonwealth Institute
• Girls in Tech
• Golden Seeds
• Massachusetts Small Business Development Center Network
• MVVF Women’s Collaborative
• Simmons School of Management
• State Office of Minority and Women Business Assistance
• Springboard Enterprises
• Women Entrepreneurs in Science and Technology
• Women In Technology International
• WPI Venture Forum

The Capital Network provides education, resources, and a community for entrepreneurs seeking funding. We join the larger community in the challenge of answering these questions and building a sustainable ecosystem for womens entrepreneurship. Learn more about us at www.thecapitalnetwork.org.

On November 9th, over 50 entrepreneurs gathered at Nutter McClennen & Fish LLP for a full day of panels, discussions, networking, and mentoring with some of the best known entrepreneurs, investors, and service providers in Boston. The TCN Venture Fast Track is a bi-annual event designed to provide entrepreneurs and investors an in-depth understanding of what it takes to raise early stage capital for a start-up. The Fast Track is a full-day version of TCN’s comprehensive Roundtables and Expert Lunches.

Check out what the participants thought of the event! (Most soundbites taken from Twitter)

• Venture Fast Track 1 day boot camp. Impressive intro, great energy.
• Good time speaking at the TCN bootcamp. Boston entrepreneurs never cease to impress me.
• I’m impressed with the depth & quality of the information on VC deals, valuations & equity today
• Killer lunch-mentor session at The Capital Network Fast Track session. Networking anyone?
• Skip the MBA, just go to a TCN venture Fast track boot camp, save $80k.
• Speakers at TCN Venture Bootcamp proving that the analogy between dating and investment never grows old!
• Beth Marcus is dropping some very practical advice at tcn venture fast track, thanks!
• Good to see several MassInno companies here today at Venture Fast Track - good content for startup founders
• Fast track event by TCN was the most educational event I’ve been 2 so far in the startup scene here in Boston. Thx MassInno & TCN!!
• Thx MassInno & TCN for the awesome educational and networking experience today. Looking fwd to more!
• My favorite part was definitely the lunch session. Being able to have 2-3 mentors at our table that we could pitch to was invaluable. They gave me great feedback and asked me some thought-provoking questions. I also enjoyed meeting all the other entrepreneurs and hearing about their ideas. There was great energy in the room.

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Want to experience the quality TCN programming? Check out our upcoming events.

Lastly, a big thank you to Nutter McClennen & Fish LLP for their generous sponsorship of the TCN Venture Fast Track, and to our wonderful speakers and mentors.

Entrepreneurs who have successfully launched and grown their venture will inevitably have to start preparing for an exit. At last week’s panel on Financing Growth and Exits, The Capital Network (TCN) brought in an expert panel consisting of a successful entrepreneur, an investor, an investment banker and a lawyer to provide participants with a complete overview of the exit process. Here are some highlights of the Breakfast Roundtable on June 29:

Exit experiences become a complex but exciting process of “letting go” for entrepreneurs. Dr. Murat Kalayoglu, Founder and Chief Science Officer of HealthHonors, successfully took his idea from start-up to a successful exit in just 3.5 years. His advice was:

• Take the time to prepare the business, (as well as your mental state) for an exit.
• Leverage existing data to find new customers as well as reducing the cost of delivering incentives to customers for a speedy exit.
• A successful growth and exit can only be achieved by giving up some control and letting others help you succeed

Tim McMahon, Managing Director of Covington Associates, discussed the keys to executing a successful deal. His key points to ensure a successful exit were:

• Keep your exit strategy in mind - Company building is fundamentally about building long term monetary value
• Start raising your visibility by aggressive PR and building strong relationships with potential buyers
• Know both your tangible and intangible value drivers: revenue, profit, team, sales, expense, geography
• Articulate the story of your business and keep it consistent. What differentiates you from your competitors?
• Know your buyer universe: Market/Channel Partners, Vendors, Suppliers, Competitors, Indirect, Direct, Investors, Angels, Venture Capital, Private Equity
• Build strong relationships early and often: a successful partnership has two-way benefits at exit time
• Get organized – A successful exit takes time. Make sure your financials are in order and you have gathered the right advisors

Roger Walton, General Partner at Castille Ventures, spoke of the many paths a business can take from seed to expansion and growth, and finally to an exit. He advised:

• Any company that incurs revenues greater than $5 million and has proven its idea can grow should have begun exit preparation.
• A firm’s main motivations to acquire another company are to fulfill a strategic need, lower costs, lower risk, to increase growth or valuation potential, or to acquire a unique technology, intellectual property, or team.
• The keys to a successful growth in the eye of the investor are a large market, sustainable competitive edge, a scalable offering and business model, and a scalable team. Firms that take all of this into account should consider themselves in good standing to be acquired.

Panelist Paul Sweeney, a Corporate Partner with our sponsor Foley Hoag LLP, provided some key tips for entrepreneurs to consider when preparing for an exit. He advised:

• Founders should always remain in close contact with their lawyer and collect due diligence throughout the entire lifetime of the business.
• Don’t lose track of your equity holders: make sure your stock ledger and capitalization table are complete, correct and up-to-date
• Don’t ignore 409A problems: Granting options below fair market value can have a very ugly result
• Founders should limit unaccredited investors because unaccredited investors such as friends and family often impose a greater disclosure liability, are not as sophisticated as an accredited investor and require more disclosure.
• Pay close attention to key LOI terms, i.e., purchase price calculation, tax treatments of certain issues, identification of non-competes and employment agreements, indemnification limits
• Don’t give away “veto” rights unless absolutely necessary: Preferred Stock investors should be only non-founder player with right to block transaction
• Don’t freely grant Rights of First Refusal or Rights of First Offer

While founders, investors, lawyers, and acquirers all play a vastly different role in an exit, all are an essential part of the process. Learning what to expect from each party will help entrepreneur’s carry out the most successful exit.

A key theme mentioned by all panelists throughout the program, is the important of building strong relationships early. It is important to build relationships with customers and potential buyers early on to ensure a successful and competitive sale process later on.

As the Chairman of The Capital Network (TCN), I am pleased to introduce the launch of the TCN Blog: “Getting Funded”. I view this blog as another forum for our community to discuss issues of interest to Boston-area Entrepreneurs and Investors, particularly with regards to raising early stage capital for high growth startups.

One of the unique aspects of the TCN Blog is that we will feature guest bloggers from the Entrepreneurial, Angel and Venture communities as well as the expert opinions of key Sponsors. Hopefully these different viewpoints will help you better understand what is really important for YOUR venture.

Keep this blog bookmarked — and better yet, subscribe to our RSS feed — and learn critical lessons from the greater TCN community. And most of all, participate in the discussion. Nothing enhances learning more than exchanging ideas and sharing experiences.

Jeremy Halpern
Chair, TCN Board of Directors
Managing Director, Evolution Advisors LLC