As we continue to see many exciting advancements in the entrepreneurial ecosystem in our region as well as in the state as a whole, I came across the following article that contains a number of important “nuggets” regarding venture funds.  A few particularly important points in this that were worth highlighting follow.

1. Those with experience in the venture industry will tell you that the typical portfolio (made up of 8 – 10 companies on average – more in very large funds) contains a few companies that are total losses, a few companies that provide a return of investment, and a few companies that provide a return on investment.  Simply put, a small portion of the portfolio provides the greatest return lifting the returns on the total portfolio to the annual target of 25% - 30%.  Experience in the venture industry and specific market segments is a clear differentiator among funds who perform in the top quartile.
2. This article indicates that those returns have been shrinking over the last decade to lower levels much like the general population has seen in its retirement portfolio.  As a result, the overall venture industry is shrinking.  There are fewer funds today than there were just a few years ago by a significant percentage. You see VC shrinking (by capital raised and number of funds) for a couple of reasons. Less returns means less capital for reinvestment in the VC fund. Second, the loss of value in the public markets means that VC, a private source, increased as a percentage of the total fund. Most capital managers don’t want VC and other higher risk funds to represent too much of their portfolio.
3. I hear many venture fund managers today that are focused on a couple of key points among others: Proprietary deal flow and how their team can add value beyond just funding.  This idea of proprietary deal flow is a critical one – they want to source deals that fit a very defined investment profile and then stay very close to the opportunity as the investment round is sourced.

As this article points out, a number of leading institutions (and some very smart people leading these) are working to fill the gap created as the industry pulls back.  I firmly believe that you will see these institutions partnering with people who have experience in this space.  This was a broad practice among the new TNInvestco funds created by the State of Tennessee.  Many of those fund managers, including those with industry experience, reached out to partners who could fill gaps they may have had on their management teams.  I have had the pleasure of meeting a number of these people whom are not only really smart people  but truly good people to work with.  As a matter of practice we encourage among our client companies, it is always good to see this.  Any institution considering launching a new venture endeavor would be wise to practice this as well.

 Click here for the link to the article---->

It seems in our community, as in many, the frequency of business plan competitions is on the rise.  Our organization, the CEG, is responsible for some and we participate in others.  There is often some package of prizes that may include cash, services and free rent at an incubator; as well as the obligatory bragging rights a company can use in their PR upon winning a contest of some sort.  Sometimes there is no prize at all.  In every case a pitch competition gives a company the chance to get public attention in the hopes that an angel investor is in the audience and a term sheet is just a phone call away.

There is a downside.  It takes many hours to prepare a small set of high impact PowerPoint slides and if you follow the advice of Guy Kawasaki, you have to practice 25 times (yeah, right...).  Plus if you look on anyone's top ten list of fears, public speaking is usually among the top three.  If you factor in the fact that there can only be one or two winners in a pitch competition, what's the point?  Wouldn't you be better off writing that extra code for that smash hit iPhone app?

In previous posts, we discussed the importance of conducting primary market research on your product idea, even before you develop the product, to make sure you validate the solution people will buy.  But where do you go to validate your business model?  You can go to advisors which can be of great assistance and you can start the process of raising equity based capital but you will find that a good competition will provide great feedback in a supportive setting.  As an entrepreneur, it is vital that you learn how to communicate your company's value proposition in a way others can understand it, especially if they do not understand your industry or specific technology.  For those potential investors who are familiar with your market segment, you are at a bit of a disadvantage because they can sniff out pretty quickly if your strategy makes money or not.

Pitch competitions provide a laboratory for you to work out how to communicate your great idea to the world and test out whether if others will buy off on your value proposition.  Here are some key developmental benefits of a good pitch completion:

• Focused messaging - competitions typically limit you to 8 - 15 minutes to make your pitch.  That is not a lot of time and you are forced to cover a lot of ground in a few minutes.  With practice, you can learn how to condense a clear message about your company which is always helpful in any setting.
• Feedback - most competitions provide a feedback mechanism for the participating companies from a panel of judges.  This feedback may validate you message or it may reveal weaknesses in your message you don't communicate well.  Make sure to ask for feedback forms.  During breaks, talk with the judges and get their cards.  Ask them for a follow up meeting and buy them some coffee.  Most of them will be happy to talk with you.
• Learning to think on your feet - You have to anticipate every possible question you may get and even then, a judge may throw you a zinger.  You will crash once in a while but you will learn how to respond to those questions with credibility.
• Learning to deal with conflicting feedback - If you present to five judges, it is possible to get five differing viewpoints on your presentation.  Some may love it and some may just not get it.  You will get this in real life and every time you are challenged on one of your claims, you get better at your response.  It is good to get these challenges from time to time because it makes you revisit your message and evaluate ways to make it better.  You can't do this by reading books and taking seminars.  Remember, not all good advise is really good... and not all bad reactions are really bad.
• Dress rehearsal for fundraising - If raising capital is in your future, you will pitch your company to dozens of potential investors. This time it's for real and investors may not be as forgiving, nor will they be forthcoming with helpful feedback.  You're much better off honing your message in a more educational environment.
• You don't have to win in order be there -  Picking a winner is a tough job and good companies are turned down for subjective reasons.  We have seen plenty of follow up meetings with investors come from pitch competitions with companies that were not even among the honorable mentions.  Like Woody Allen said, "80% of success is showing up."

Here is a link to a great article by an entrepreneur who went through a series of failed attempts to win several high profile pitch competitions and the treasures she found by just showing up: http://www.xconomy.com/san-francisco/2010/06/15/hatching-a-lark-an-entrepreneurs-journey-through-the-business-plan-competitions/?single_page=true

Geoff Robson found this video on the peHUPwebsite.  It is a interview with Keith Rabois who is an angel investor in Silicon Valley.  In the current calendar year, Keith has closed nine deals and has three to five pending.  Last year he closed nine deals.  He certainly has his finger on the pulse of early stage companies.  In this 22 minute video Keith covers these points and others:

• The best entrepreneurs are isolated from the crowd
• Angel capital seems to be increasing and one driver is a lack of other places to invest right now
• Exits in the angel capital space are in the $20 to $30 million range right now
• There is a current 5 - 10 year horizon on liquidity (exits)
• He gives great advice on how entrepreneurs should interview potential angels
• Entrepreneurs should learn to love chaos
• Although Keith focuses on web based startups. he has some experience with tech based companies as well.
• He believes Apple is driving a change in the use of the internet through the iPad.  There is a huge opportunity for applications.

This interview is a great insight into the thought process of a very active angel investor.  Bear in mind this is the West Coast but much of it applies universally.

Has it really been a whole year?! 

Let's see, we've posted over 60 articles and videos and we now have an average of 750 visitors per month.  We have had over 5,700 unique visits over the year.

We knew nothing about blogging when we started and now, at least we have attained a state of Conscious Incompetence.  I now count "embed code" "RSS Feeds" and "SEO" as topics for dinner conversation and I know a few things about the web my teenagers do not.

We have maintained our original vision of a free educational blog for entrepreneurs with rich content one can use to build a Fundable Business Model and we have remained relatively free of editorial positions and taking sides in the ongoing economics/political debate.  To commemorate the occasion here is a top ten list of the most popular posts:

1. Making the Funding Pitch
2. Venture Capital in the Tennessee Valley Corridor - by Grady Vanderhoofven
3. To Board or Not To Board?
4. Top Ten Things I Learned About Startups at the CEG - By Bob Wilson
5. What Is Value?
6. Vol Court Session 4 - What's Your Game Plan? - By Lynn Youngs
7. "Value is in the Eye of the Investor" - Six Key Validations that Increase Your Company's Value
8. I am Your Customer. Listen To Me!
9. Are You an Inventor or Entrepreneur?
10. Entrepreneurs and The Balanced Scorecard

In the coming months we plan to introduce video interviews with entrepreneurs who are getting it done, links to our online educational content, an entrepreneurial library, CEG Tool Kit and a self evaluation tool for your startup so stay tuned.

It's been a great year and it went by in a blink.  Thanks for reading and watching!  Now go create wealth and meaning!

 We got a request from the listserve at National Business Incubation Association (NBIA) for some tips reguarding mentors receiving equity.  Before I knew it, we had a list:

1. First, make sure the amount of equity is appropriate.  A mentor is a key advisor and the appropriate range is 1 – 2%.  More than that might be questioned by a future investor.  Now if the mentor has the financial means to invest, then obviously, more equity is in order.
2. The agreement should be formalized with an attorney’s help.  It does not need to be complicated but it does need to be clearly documented…again to avoid a problem with a future investor.  It is a good idea to state specifically what the mentor is providing the company in return for the equity.  It could be a number of meetings in a year, number of hours, a number of introductions, the completion of the business plan, or whatever but the agreement should state something tangible or measurable that provides value.
3. Don’t issue actual stock.  There are tax implications.  Grant options that can be executed at a future liquidation event such as an acquisition or other type of exit.  This also avoids declaring a valuation that does not involve bringing money into the company.
4. Consider granting the options over time and according to the delivery of the value stated in the formal agreement.  For example, the mentor gets ¼ point equity for each monthly meeting over a year.  This way, if it’s not working out, you haven’t given away 2% of your company to a jerk.
5. Make sure the fit is good.  The company should have profiles of the skills they need but do not yet have on the team.  These could be financial, operational, technical, etc.  There are also roles that need to be filled like someone who can keep the entrepreneur’s feet on the ground and challenge them when they get off track.  A mentor should fill at least one of these roles but it’s best if they fill a couple.  Here is a blog post from OutOfTheGarage.com that goes into this: http://www.outofthegarage.com/outofthegarage/2009/7/1/to-board-or-not-to-board-a-primer-for-forming-a-board-of-dir.html
6. Realize that equity is an instrument of value.  Free advice is worth what you pay for it but as soon a you do, you expect results.  In our experience, CEO's tend to attach some pretty strong expectations to their equity.   If the mentor is helping raise equity capital, then the CEO expects to get an investment and if it doesn't happen, the mentor gets part of the blame.  This goes back to identifying the specific value given in exchange for the equity.  CEO's should remember that the person responsible for company success is the CEO...NOT the mentor(s).  Choose them carefully but realize their role is to advise, challenge you, make introductions,etc.  Growing your company is YOUR job.
7. You don’t want to end up with a dozen mentors each owning 2%.  This puts a huge burden on the one or two mentors that actually deliver.  Select them carefully.
8. Make sure the mentor is not soliciting for their consulting business.  We have seen service providers offer advice and mentoring only to put the company in a tough position down the road by charging exorbitant fees for their introductions to investors or wanting huge commissions for sales activity.  A true mentor would advise the company and offer their skills just for the pleasure of helping to make the company successful.  Equity is reasonable compensation.
9. Incubators may require equity as well.  They have have to have a pathway to sustainability and requesting equity shows they have a long view of company success.  Treat this judiciously.  We have seen incubators require equity for every company, which can cause problems for all the reasons stated above.  An equity arrangement is very personal and each case is different.  This should not be institutionalized.  Make sure there is an agreement in place that specifies what you get for your equity.  If it is merely a connection with a prominent incubator organization, it may be worth it but these guidlines still apply.
10. Equity is NOT a part of your soul...but it is a part of your company.  Treat it as a thing of great value, expecting great value in return.  Remember, equity is a Strategic Management Tool.

Our 1st birthday is coming up in a day or so and we will post some of the successes we have enjoyed in the 1st year of OOTG.  One of those has been over 5,700 unique visits to the site and we are thrilled people have found value in our content.  With that level of traffic, our readers have finally begun to engage in the comment sections of our posts. 

Our purpose at the outset has been to provide an educational platform to help entrepreneurs build successful companies.  We encourage contributions by our readers in the form of comments on each post that foster dialogue on the education content and the concepts presented.  Readers are free to challenge these concepts and provide alternative viewpoints as long as they are instructive to the topic and constructive to our mission.

OOTG is not intended as a platform for personal viewpoints with regard to political issues, individuals or institutions.  The site administrators will manage the posted comments accordingly.

Thanks for your support of the site and help spread the word.

Our friend Chris Miller,of Meritus Ventures, recently spoke on the History of Venture Capital.  Chris has a blog, www.rockytopmba.com, and he frequently shares thoughts on the status of venture capital, entrepreneurial education and his list of favorite movies for 2010.  Jonathan Patrick, author of 898Enterprises invited Chris to guest blog with his notes on the recent speech.

I doubt if Christopher Columbus was the first entrepreneur but the story begins there with Mr. Columbus' journey of raising capital for his venture to the New World.  Like many ventures, he ended up in a different place than the original destination.  Instead of finding a new trade route to the Indies, he discovered a different world with different treasures.  Talk about "Getting to Plan B"....

The story finishes with a summary of Goerges Doriot and his principles of venture capital which laid the foundation for the modern venture capital model.

Here is the link: http://898enterprises.wordpress.com/2010/06/14/guest-blog-by-chris-miller-of-meritus-ventures-a-must-read/

Rob Adams was the key note speaker recently at the Tennessee Innovation and Venture Showcase in Nashville.  As registrants for this event, we were given copies of his new book, "If You Build It Will They Come?"  My schedule required me to be away but my colleagues all came back quoting Rob's presentation.  Here are some of the thoughts that found their way to me:

• Spend two months on a deep dive into the market BEFORE you build the product
• Talk to 100 people during this market deep dive
• If 30 [customers] give you the same specification, then you have enough to build it
• Don't be afraid to disclose your idea.  He [Adams] has never seen anyone steal an idea from a small business concept
• People [investors]don't fund science
• Failure:
  • 90% of new company starts fail
  • 65% of new product ideas fail
  • There is over $260 billion spent on failed companies and products.  Only $160 billion spent on successful companies and products
  • Most companies fail due to an inability to scale
• If you have enough time to build it and do it over after it fails, you have enough time to ask your customers if the solution you are considering solves their problem

I didn't hear the speech but I did read the book.  One thing I really like about the way Rob writes his books is that he tends to be matter of fact if not blunt about the most important points.  His books are part inspiration and part field manual.  In his first book, "A Good Hard Kick in the Ass," Chapter 2 was dedicated to understanding customer value.  In my copy, that chapter has more yellow highlighted sections than not.  Understanding what customers value (and pay for) has become a foundational part of the educational message of the Center for Entrepreneurial Growth.

"If You Build It, Will They Come?" is a deep dive into this concept.  Rob states that "Most companies take a ready, fire, fire, fire, aim approach to delivering their products or services."  As you might expect, he advises taking a ready, aim, fire approach and in fact, that is the way his book is laid out.  "If You Build It..." comes as close to an instruction manual as you will find and Rob even presents an outline for the timing and cost of this effort.  You should plan on spending 10% of your development budget and allocate 60 days to accomplish a Market Validation effort.  The rest of the book tells you how to do it.

In the Ready section, he tackles high level market research as a test to see if your idea is worth pursuing.  Topics include how to evaluate market segments, market adoption life cycles, macro economic factors and competitive analysis.  The Aim section gets to the heart of the matter with an extensive tutorial on primary market research... actually talking to your customers.  He illustrates the proper balance between qualitative information and quantifiable data you can use to make strategic decisions.

The Fire section points out that most technology based startups fail to allocate sufficient funding for sales and marketing.  Again, in true Rob Adams style, the answer is simple and direct; budget the equivalent of your R&D budget to sales and marketing in the first year.  The market validation activity continues in this stage because nothing provides customer feedback like their use of your first product.  At this point the development process must be nimble and responsive.  Rob reiterates a concept from "A Good Hard Kick..." and that is: not delivering the perfect product.  Rather, deliver a product quickly with minimally acceptable features, get customer feedback and interate your pathway to the perfect product.

"If You Build It..." is packed with ideas but delivers them in a concise package and a quick read...but you won't read it once and put it on the shelf. This is stuff you can use today.

The Vol Court Series wraps up with a great session led by John Jansheski who is the founder of DenTek, a company in Maryville, TN, that provides products for Oral Health Care.  John was employee number one and has grown the company to now where they have over 200 employees.

There were no PowerPoints; just life lessons from a man who had to figure it all out along the way.  The cool thing is that John touches on every other topic in the Vol Court Series and it all comes together in a real life case history.

In Session 7 - we move into the often obscure realm of Entrepreneurial Finance with a presentation by Chris Miller of Meritus Ventures.  Chris is an analyst with the venture fund and his job entails doing a lot of the ground work to evaluate deals and perform the due diligence required of any investment deal.  He has a unique perspective in that he knows, at a basic level, what will get the attention of the fund partners; what works and what does not. 

The presentation is laid out in three main topics:

• What is an entrepreneur?
• Why should I care about Finance?
• What should I know to be successful?

The presentation closes with a case study of two hypothetical entrepreneurs who choose different strategies to fund the growth of their companies.

In Session 6, we have Dan Ryan from The Human Capital Group.  Dan is presenting an often overlooked discipline in the creation of a startup company or any other endeavor.  Dan touches on the importance of using social networking platforms today in addition to several traditional networking strategies.  Here is the general outline of the talk:

• Why is Networking Important?
• Reasons to Network
• Who should you network with?
• Networking Circles
• Networking Basics
  • "Never Eat Alone" by Keith Ferrazzi
  • Ask for Help
  • Ping constantly

Session 5 of Vol Court brings to us Mr. John Morris of The Center for Entrepreneurial Growth.  The overall topic is Staffing the Startup and John borrows a theme from the landmark book, "Good To Great" by Jim Collins.  The main message is to focus on the roles necessary to create a successful venture rather than the individuals you may know.  Here's the outline for the talk:

• Why are YOU great?
• The Bus
• Getting the right people on the bus
• Where to go
• Who's driving the bus?

The MIT Enterprise Forum met recently in a session of over 300 attendees. The topic: “Accelerating Startup Growth: Seed Funding, Incubation and Mentorship Models.”

There was a stellar panel of speackers on the topic that included

• Laura Fitton, founder of Twitter app store oneforty
• David Cohen, founder of TechStars, an intensive 3 month program for seed stage companies
• Dave McClure, oversees the Founders Fund seed-stage investment program
• Gabor Garai, partner at the law firm Foley & Lardner devoted to the legal aspects of investment and entrepreneurship

Mr. Garai listed several key points when it come to brand new startup companies

• Focus on the business.
• Learn to handle crisis.
• Keep a simple structure.
• Don’t worry about core people leaving the team—it will happen sooner or later.
• Don’t bother too much about IP or the dilution an investor wants—it’s not about the slice of the pie, but the pie size.
• Don’t invest energy on issues such as how to cut taxes, etc; it only fragments your focus.

A key takeaway on these comments is that business plans are often way over engineered, especially for new ideas that have not proven value with strong sales.  At the early stage, there will be a lot of assumtptions made in order to get a pro forma and a detailed business plan together and at best, they are going to be educated guesses.  You can't afford to waste a lot of time getting hung up on clarifying details based on SWAG's. 

Here is a link to the review article: http://www.xconomy.com/boston/2010/03/12/forget-business-plans-go-for-market-and-passion-say-investors/

In Session 4 of Vol Court, Lynn Youngs presents the best 1 - hour business plan course we've seen.  Here's the link:

In Session 3 of Vol Court, Shawn Carson discusses understand customer value as a cornerstone of the business and the impact customer value has on the strategic planning process.

Here is the link: