The Art Of Accessing Venture Capital - Part 3

The Art of Accessing Venture Capital panel continues as Grady asks the panel about common deal breakers and mistakes entrepreneurs make that can cause problems for due diligence.  Chuck Witkowski responds to the question, "What would you do over?"

A great quote from Paul Grim: "A good lawyer is worth their weight in gold... a bad lawyer is worth their weight in something else..."

The Art of Accessing Venture Capital - Part 2

The Art of Accessing Venture Capital panel continues when Grady Vanderhoofven of Meritus Ventures asks the panel how agressive investors are to make investments in the current economy.  There are sone great comments about risk and valuation.

As a reminder, the panel is:

• Kathy Harris - Noro Moseley, Atlanta
• Steve Dauphin - Murphree Venture Partners, Houston
• Paul Grim - Sunbridge Partners, Sunnyvale CA
• Roddy Bailey - Miller and Martin
• Chuck Witkowski - Protein Discovery, Knoxville
• Grandy Vanderhoofven, Moderator - Meritus Ventures, Oak Ridge

For a video of the panel and their biographies, please follow this link:

The Art of Accessing Venture Capital - Panel Introductions

The Art of Accessing Venture Capital - Part One

A stellar panel was assembled for the 2009 Innovation Imperative to discuss accessing capital in today's economy.  The panel included three venture capitalists, a business attorney and an experienced entrepreneur who has raised three rounds of equity capital.  Here is the panel roster:

• Kathy Harris - Noro Moseley, Atlanta
• Steve Dauphin - Murphree Venture Partners, Houston
• Paul Grim - Sunbridge Partners, Sunnyvale CA
• Roddy Bailey - Miller and Martin
• Chuck Witkowski - Protein Discovery, Knoxville
• Grandy Vanderhoofven, Moderator - Meritus Ventures, Oak Ridge

In part one, the panel was asked what business trends they are observing and what is driving the economy.  Topics range from the government stimulus to health care to timing of the recovery.

For a video of the panel and their biographies, please follow this link:

The Art of Accessing Venture Capital - Panel Introductions

 Here's the panel video: 

ThrottleUp 2009 Pitch Competition Presentations Are Posted

The ThrottleUp 2009 Pitch Competition was held on October 22, 2009 as part of the Innovation Imperative in Knoxville, Tennessee.  You can now view all six finalist presentations at the ThrottleUp 2009 website.

 Here is a quick link:  ThrottleUp 2009 Presentations

TrakLok wins ThrottleUp 2009 Pitch Competition

 

ThrottleUp 2009 a is a venture pitch competition made up of seed stage companies.  The event was part of the Innovation Imperative, held in Knoxville, TN October 21-22, 2009.

The winner of ThrottleUp 2009 was TrakLok Corporation, Eric Dobson, CEO.  TrakLok is a product and service company deploying a solution to secure and globally track high value and hazardous cargo in intermodal shipping containers.  The initial two products released by the company are GeoLok (TM) and TrakLog (TM) and they set the foundations for an end-to-end security and management system that will dramatically increase the security of containers while maximizing the efficiency of their movement and storage.

The TrakLok website is:  www.traklok.net

Here is the winning pitch delivered by Mr. Dobson:

Here is a link to the article that appeared in the Knoxville News Sentinal: TrakLok - Knox News 

Finalists are chosen for Tennessee Valley Venture Forum and ThrottleUp 2009

Technology 2020 announces the finalists for the 2009 Tennessee Valley Venture Forum and ThrottleUp.  Both events will be held October 22 the Innovation Imperative conference.  

 

This is the 13^th installment of the Tennessee Valley Venture Forum.  The presenters include companies across the Innovation Valley and reach into North and South Carolina.  “We are excited about quality and diversity of these companies” said John Morris, Executive Director of the Center For Entrepreneurial Growth and coordinator for this year’s event.  Morris went on to say “These growth stage companies each have the opportunity to provide a significant contribution to our region.  Many of them are raising their second and third rounds of equity capital.”  The finalists for the 2009 Tennessee Valley Venture Forum are:

• Aldis - Oak Ridge
• Zipit-Greenville, SC
• Wazoo-London, KY
• Knetwits-Chattanooga, TN
• Signix-Chattanooga, TN
• FLS Energy-Asheville, NC 

ThrottleUp 2009 is a pitch competition aimed at seed stage startups.  Many of these companies are raising their first series of equity funding.  This event is also being coordinated by the Center for Entrepreneurial Growth and is co-sponsored by OutOfTheGarage.com and Knoxville Overground.  Shawn Carson, Director of Entrepreneurial Education said, “ ThrottleUp is in part a traditional pitch competition but it is also a great education platform for companies who are new to the process of raising equity based capital.”  These presenters will also receive valuable feedback on their pitch from a stellar panel of judges during a Round Robin feedback session.  “The Round Robin is a unique spin,” said Carson,” After their pitch, each CEO will sit with 6 pairs of judges who will evaluate their pitch and their value proposition.  We think it will be fun and educational.”  The finalists are all from the surrounding Knox Metro region and they are: 

• TrakLok Corporation
• Simple Control Inc.
• InstallerPool.com
• OpenURmic
• MedInteract
• Orion Laboratories, LLC 

Innovation Imperative is a three-day conference featuring national and regional leaders talking about entrepreneurship, innovation and economic trends. The event is scheduled for Oct. 20-22 at the Knoxville Convention Center.

ABT Molecular Imaging Raises $9 million Series A Round

ABT Molecular Imaging has raised a $9 million Series A round of funding led by Intersouth Partners.  Based in Knoxville TN, ABT Molecular imaging has developed a platform to generate unit doses of molecular imaging drugs for use in positron emission tomography or PET scanning. 

The company was founded by Ron Nutt, Ph.D. in 2006.  Dr. Nutt was a founder of CTi and was CEO at the time they were acquired by Siemens. 

This new platform enables local production of molecular imaging drugs.  Currently, these drugs are manufactured by very large, expensive machinery which limits their use to larger hospitals in limited geographic locations.  ABT’s Biomarker Generator reduces the cost and complexity of generating these drugs. 

Other Links:

PEHub

The Medical News

Team Health Plans $100 million IPO

Knoxville based Team Health has filed a proposal for a $100 million IPO with the SEC.  The Blackstone Group holds a 92% interest in the company.  Team Health supplies outsourced health care professional staffing and administrative services to hospitals and other health care providers in the US.  Here are some key statistics from the Team Health S-1 filing:

• 550 hospitals served in 46 states
• 6000 health care professionals
• 7.6 million patients served
• 2008 revenues - $1.33 billion
• 2008 net earnings - $44.7 million

Other Links:

AOL Money and Finance

BloggingStocks

"Value is in the eye of the investor" - Six Key Validations That Increase Your Company's Value

It is basically impossible to determine the value of a pre-revenue startup company.  Most valuation models involve sales and profits and since you may not have either, “value is in the eye of the investor”.  Accomplishing key milestones based on your execution strategy goes a long way toward establishing credibility of your management team but there is another powerful way to build value in your company.  That is through the relentless pursuit of validations. 

First, let’s define validation in the context of milestones.  Milestones are things you control and accomplish through your own efforts.  These would include R&D goals, deploying marketing strategies, etc.  Validations, on the other hand, are the things others do in response to substantiate, or validate, your efforts.  In short, your milestones should lead to validations. 

There are six types of validations every startup company should endeavor to capture on an ongoing basis: 

1. Intellectual Property (IP) Protection – Protecting your IP through patents, trademarks, and copyrights is often an early checkbox for investors.  If you are granted a patent, beyond the obvious legal protection it provides, it means you have convinced the US Patent and Trademark Office that your idea is unique and worthy of legal protection.
2. Paying Customers – Perhaps the strongest early validation you can win is your first paid customer.  That means that someone has decided to exchange money for the value you provide in your product or service.  You should sell something as soon as possible.  Sell your early prototypes to “beta” test customers.  Don’t wait for the product to be perfect, just good enough to provide your basic value proposition.  Not only do you get early sales, but you get excellent feedback on version 2.0.
3. Quality Key Employees – You will need help.  Jim Collins says to get the right people on the bus before you decide where the bus is going.  Find people with the skills and experience you lack.  If they joining you at a reduced salary in exchange for equity options, it shows everyone’s interest is aligned in building company value.
4. Partnerships and Alliances – These are companies who have joined you in pursuing your business opportunity, maybe even exchanging their value to you for a future benefit.  An example is a manufacturing partner who develops a prototype at cost in exchange for the rights to manufacture the product.  Another is a sales distribution partner who develops your marketing message and sales collateral in exchange for the right to sell the product at a commission.  Partnering early keeps preserves your cash.
5. Advisors – As early as possible, find smart people who will give you some of their time and expertise because they want to you to succeed.  These include business mentors, legal and financial advisors, academic experts and world renowned researchers.  Ask them for permission to be included in the business plan and executive summary.  Their name will lend credibility to your management team. They may also be your future board members.
6. Funding Partners – In addition to your own personal capital investments, it is important to scan the horizon for seed stage funding sources.  These include federal, state and local grants like SBIR’s and SBA backed bank loans.   Also include early investors such as friends and family but especially angels.  These people have given you money because they want to participate in your vision and share in the future returns. 

Everything in your business plan – every strategy, goal, and milestone – should have a targeted validation at the end.  Your prototype should find a beta customer.  Your marketing plan should lead to a sales partner. The more validations you stack up early, the more you manage risk, and the more value you build in your pre-revenue startup.

ThrottleUp 2009 Aimed at Innovative Startups Seeking Funding

 

In January of 2010, there will be six new venture capital funds (TNInvestco’s) across the state of Tennessee with a total of $120 million to invest in seed stage companies. These TNInvestco’s will have a requirement to deploy up to half their capital within the first two years. What that means for entrepreneurs is there will be a bit of frenzy over the next several months as both the investors and entrepreneurs work to find each other.

ThrottleUp 2009 is a pitch competition that is part of Technology 2020’s annual fall conference, this year called Innovation Imperative. The competition is aimed at startup companies in the East Tennessee Development District that have:

1. An innovative business model or technology

2. The ability to sustain annual growth of 20% or more

3. The need other people’s money to fuel the growth

ThrottleUp 2009 is an opportunity for seed stage ventures to begin getting experience preparing for a venture pitch, with the goal of putting them in the best position to raise capital from any investor. Applications are now being accepted from which six local companies will be chosen to present an eight minute pitch in a venture forum setting. Following the pitches, the companies will have the opportunity to receive feedback from six pairs of judges on their business idea and their presentation. The winner of the competition will have the opportunity to present at a state-wide showcase for the TNInvestco’s in January 2010. There is no cost to apply or present at ThrottleUp 2009.

The Throttle Up 2009 website has information on the competition format, judging criteria, application and there is also an educational video on making a funding pitch.

The website is: www.throttleup2009.squarespace.com

Link: Waterfall Charts and Exits

This short article by Ben Dyer provides insight into the mind of the investor(s).  He shares a scenario in which a company exits after an angel round and two rounds of VC funding.  The first case shows how not everybody wins; the losers being the Angel and the management team.  In the second case, everybody wins but it's typically not the Angel who gets to decide.

The key insight here is that Angels  are particularly sensitive to being "crammed down" in later rounds.  Those that have had this experience will no doubt take steps to protect themselves.  (See the reply from Knox Massey.)  This is why you may see anti-dilution clauses in your term sheet and why Angels may require greater than 40% of your company.  This illustrates how angels may value your company when it seems that it has nothing to do with your valuation calculations.  Quite simply, it's about how much of your company they need to get their return when the water falls.

What's the entrepreneur to do?

One term that seems to be entrepreneur friendly is where the angel investor has the right to participate in future rounds, hence the name, participation rights.  This is what they mean when they say they are "keeping their powder in reserve."

The key takeaway is for you to have a thorough understanding of your funding needs, from the initial seed round to subsequent VC rounds, all the way through exit. The primary vehicle that communicates this is the Cap Table, showing each round of investment, along with a projected valuation.  This will set the stage for your first investors, showing them how their investment is diluted through future rounds and where you plan to be at exit.  This is how they will calculate their return and even though they will do it for themselves, you having done it will give them a place to start and it will show that you understand the game. 

Here is the link: http://techdrawl.com/waterfall-charts-and-exits/

New Video: Making the Funding Pitch

We just produced a training video on preparing to make a funding pitch.  This is in conjunction with the ThrottleUp! pitch competition that will be part of Innovation Imperative in October. More on that later.  Let us know what you think about the video...

First, check out Steve Job's introduction of the iPod.  We use this as an example of style and format:

Now enjoy "Making the Funding Pitch"

Making the Funding Pitch from Shawn Carson on Vimeo.

Tennessee Improves Standing in Entrepreneurial Score Card

Tennessee has improved its standing in the 2008-2009 Entrepreneurial Score Card to #22, up from the #31 position among all the states in the US. The Score Card summarizes data into three main categories, and Tennessee achieved substantial gains in two of them. In the Category of Entrepreneurial Change, Tennessee Improved from #29 to #12. In Entrepreneurial Vitality, we scored 24, up from #36. In the category of Entrepreneurial Climate, we still face challenges with our ranking of #36.

Each year the Small Business Foundation of Michigan (SBFM) publishes the Entrepreneurship Score Card. It researches more than  125 objective metrics and rank each state within each metric. The scores are based on raw data and are not weighted in any way. The value in the score card is in the trends it has revealed in the 5 years of its existence. The SBFM uses the data to evaluate Michigan’s position across the categories of metrics in hopes that policy makers will recognize and support entrepreneurship as ing among the most important factors affecting economic growth. The incredible thing is that the Score Card research ranks every state and the data are available in the report.

We have extracted the data for Tennessee along with all our border states to see how we compare. The Score Card is summarized in three main categories along with an overall ranking called Entrepreneurial Dynamism.  

Tennessee moved from 31 to 22 in the overall position of the Score Card, and putting the state right in the middle of the southeast region behind VA, NC and GA.

Entrepreneurial Change is a group of metrics that seeks to measure “churn”, which is a measure of new business formation as well as those that fail. A healthy economy has both and it shows the degree to which entrepreneurs are willing to take on risk in order to create wealth. It is an indirect indicator of how many “serial entrepreneurs” there are. Tennessee has improved significantly, rising to #12 from #29, just behind GA. The biggest driver for the improvement was the increase in High Performance Firms which are fast growing technology oriented firms listed on Inc.com and Deloitte and Touche’s Fast 500. Here Tennessee is tied with 5 states for the #3 spot. A little ground was lost in Small Business Payroll Growth (#21 from #16) and Proprietor Income Growth (down to #32 from #21).   

Entrepreneurial Vitality measures the amount of startup activity across a range of source data as well as providing some insight into the funding sources such as SBIR’s and debt. Again Tennessee had very respectable gains improving to #24 from #36, and placing the state right in the middle of our southeast neighbors. In this category, there were 6 results among the top 20 across the nation. The biggest driver was in the Entrepreneurial Activity Index published by the Kauffman Foundation and it measures business creation by individuals and non-corporate owners. The increase was incredible, moving up to #4 from #34. However, Tennessee is still lagging the country in two areas. Expansion Job Gains measures the number of jobs created by fast moving growth companies, which is an indicator of risk level among the startups. Tennessee fell from #15 to #30. This would suggest that even though new companies are being created, they are not growing very quickly which points to the next category, Entrepreneurial Climate. The other area Tennessee lags is in the number of SBIR and STTR awards. Virginia and Alabama rank # 4 and #7 respectively but the rest of the southeast is typically in the bottom 40%. 

  

Entrepreneurial Climate measures the business and institutional environment as a base of support on which entrepreneurial activity can grow and thrive. Tennessee ranks #36, down a spot from #35. This puts the state firmly in the bottom half of the southeast, far behind Virginia (#3) and North Carolina (#7).  

There are three sub-drivers in the category. Ideas and Innovation measures investments and returns with respect to innovative activity. While the state is doing quite well with universities licensing technology to small business (#11), the state is well behind in overall University R&D expenditures (#37), Patents and Patent Productivity (#36 and #33), and the funding rate from NSF and SBIR’s ( #31 and #32). There has been very little movement year over year in most of these areas. Tennessee is doing well with royalty income from the university technology licenses at #20 and EntrePoint’s list of the top Entrepreneurship Colleges puts the state at #20.

In the Financial and Institutional Capital sub-category, the news is a little better. Overall, Tennessee improved to #20 from #28. Strangely enough, in a world where IPO’s are virtually non-existent, the state won the top spot in the country for IPO Financing as a percent of GDP. SBIC Financing is a measure of SBA regulated private investment companies per $100,000 in GDP. Tennessee ranks an impressive #12 and scored #15 in Private Lending to Small Business. Venture Capital sits in the middle at #25. We have great hopes for the new TNInvestco’s to improve this metric. As the number of SBIR awards would indicate, the amount of SBIR financing is dreadful at #38.

 

Conclusions

A lot of hard work from across the state is paying off for the cause of entrepreneurship. Clearly, the overall entrepreneurial activity is on the rise at a faster rate than most other states. Tennessee holds top 10 spots in 4 categories and top 20 spots in16 of the 45 overall metrics. The state seems to be creating innovation-based new ventures at a blistering pace although once created, they are struggling to grow. This calls for more support and mentoring programs for companies once they are up and running.

The biggest opportunity is the overall investments in R&D at all levels. Tennessee's scores indicate that R&D investment as a percent of GDP are in the bottom third of the country. The source for Federal R&D research investment is a report from NSF on Science and Enginerring R&D.  It is not clear if that includes DOE and DoD Federal research funding. However, the follow-on indicators support these trends. These include Patents, Patent Productivity, SBIR and NSF grant funding. The bright spot is the #11 ranking in openness of the universities to license their technology to small businesses.  

It is very important to point out that much of these data are two or more years old by the time they are published and made available. For example, SBIR data usually runs about two years behind the current funding year. Certain US Census data are only updated every 5 years or so. The value is in the trends year over year. It will be quite interesting to see how the Federal Government stimulus funding will impact the trends as well as Governor Bredesen’s energy initiatives.

Thanks to the Small Business Foundation of Michigan for making these data available for everyone.

Here is a link to the 2008-2009 Entrepreneurial Score Card:

https://www.sbam.org/Contact/Foundation/

For a link to the Tennessee results of the score card:  Tennessee Rankings - Entrepreneurial Score Card

Six P's to New Product Success By Jerry Carlson

(Editor's note:  Jerry is a long time friend of the CEG and has been a great mentor to many of our companies.  He is currently "failing retirement" which is a good thing for our community.  We are honored to have him contribute this post. The tag line at the end is worth the price of admission.)

New products are like hairstyles: everyone’s got one, most people fiddle with them all the time, and they’re never just right. Wouldn’t it be great if there were just some simple formula to guide a company through all the hassle and anxiety of creating a great new product? One guaranteed to be a winner?

There is. And it’s no secret. Even better, it’s been tested and proven in the marketplace, for more than a half century. It’s a bedrock principle, internally called “Product Plus”, at one of the world’s most successful and admired consumer product companies.

The Product Plus concept has several components. Each makes a critical contribution to the success of the product. The first two parts focus on the purchaser, as they should. After all, that’s why you’re doing this.

First, solve a Problem; ideally, a recurring problem (recall that King Gillette gave away razors, but sold blades). Spend your time defining the problem you are solving and understanding the person who needs the solution. The better you define the problem, the better your solution will be. Be specific, be quantitative, and above all, define the problem as the user does. Remember Liquid Paper? Typewriter, meet word processor.

Next, have a clearly visible Performance Advantage; one that every user can see immediately. Differences that take a statistician or a laboratory to find don’t count. Those tools will help during development, but the end product must have a user-perceivable performance advantage that every user notices. Your solution must be unmistakably and obviously better than all past attempts. Accept nothing less here. If you compromise, you will find yourself competing for sales using price or puffery - and neither is a sustainable advantage. These two steps focus specifically on the purchaser, The purchaser is the one who makes the buying decision...not, necessarily, the one who actually spends the money (sometimes an expert –like a physician, financial advisor, or spouse, makes the decision, which the user implements).

The next two parts of the concept really benefit the company, but they are critical. A Proprietary Position is essential. Patents last a decade or two, trade secrets and processes are (sometimes) forever. Whichever you choose, create a solution which you own. Branding can create ownership, too, but takes much longer (and can last longer) than the legal or technical approach. A good answer is to create a brand image that can outlive the patent or process lifetime. Aveeno skin care products once depended on a process, but the brand has been so well established to consumers (and dermatologists) that no significant competitor has been successful in the marketplace.

A good fit with your company’s Production Capabilities is another essential. Stay close to your core capabilities, and be sure you understand them clearly. Doing so will make you the most efficient producer, another sustainable advantage over any competitor.

Taken altogether, these four attributes of a new product support the last two: Price and Profit. A product manager I knew put it this way: “You’ll never buy a better product at a higher price”. Sears (and a few others, like Snap-on) don’t sell cheap tools...and that value/quality approach remains a strength of the brand even today, despite many other mistakes. Don’t make the mistake of thinking that pricing for value means a low price!

Pricing power, combined with efficient production, creates a profitable business. Profits are the engine that drive improvements, allow investment in research, and increase wealth in all senses of the word.

A successful new product is a proprietary, producible, high-performance solution to a problem which commands a price that delivers great profits.

Nothing to it. It’s easy.

Gerald L. Carlson, Ph.D.

Dr. Carlson is the managing partner in a consulting practice which focuses on new business development, new product development, technology transfer, and intellectual property management. Dr. Carlson has developed expertise in technology transfer, strategic alliance development, licensing, business planning, and technology platform development in the broad areas of food, drug, and consumer specialty products. He is the Senior Technology Advisor to The Center for Advanced Technology and Innovation in Wisconsin, a unique business incubator which uses strategic licensing as a development strategy. Dr. Carlson is also a member of the NASA Great Lakes Industrial Technology Center (GLITeC) Board of Advisors, and a mentor for the Tech2020 incubator in Oak Ridge. He is an invited lecturer at the University of Tennessee in the Law School and the Engineering MS/MBA program

Entrepreneurs Can Change the World

Need a little encouragement?

Our friend Chris Miller sent this from his site, www.rockytopmba.com