Scott Shane on Angel Investing
June 11, 2009
I am a fan of Scott Shane and his research. His Book Fool’s Gold?: The Truth Behind Angel Investing in America (Financial Management Association Survey and Synthesis Series)
The stereotype of the “angel investor” is a retired wealthy entrepreneur who sees potential, asks tough questions, takes a large stake, and in a few years makes a massive return in an IPO. This outsider fills the gap between the venture capitalist and the professional investor, swooping in with cash and expertise to bring dreams to fruition.
Unfortunately, Shane observes, this figure bears no relationship to reality. In Fool’s Gold , he draws on hard data from the Federal Reserve and other sources to paint the first reliable group portrait of the lionized angel investors. Surprisingly, he finds that they are fewer, contribute less, and involve themselves in fewer start-ups than the conventional wisdom suggests. Most angels typically still have their day jobs, make investments of $10,000 or less, and take little or no role in assisting entrepreneurs build their companies. Few of the companies they put money into arrive at IPOs, let alone massive returns. But angels can play a critical role, he writes, if the fantasy is abandoned by all concerned. Drawing on his rich store of data, Shane offers recommendations to entrepreneurs and angels alike for the most productive use of angel investing, and suggests how policymakers can encourage it. Particularly promising are angel groups, which pool knowledge and money for wiser and more productive investments. In groups, angels can rely on each other’s expertise, share the labor of performing due diligence, and generally insure that their money is being placed–and used–wisely. Fostering the formation of such groups may be the single most important thing that government can do to boost angel investing.
Shane’s research focuses on angel investing and entrepreneurship through the broad brush, however, his books should be required reading for policy makers.
3 vc’s on Venture Capital in Kentucky
May 27, 2009
At the venture club in Lexington, Elizabeth Rounsavall, Steve Gailar and Murray Wilson gave overviews of their investment styles and the state of the market:
Elizabeth with Chrysalis: We closed our fund just in time, 6 months prior to the credit meltdown($175 million fund.) We invest in companies with early revenues and early customers IT, Healrthcare services, emerging technologies. Seeing signs of recovery, announced two acquisitions of portfolio companies during the down turn, both at excellent ROI.
Murray with River Cities: invests similar industries but later stage than Chrysalis. Looking for companies with at least $3 million in revenue. Sees terms getting tougher both from banks lending to companies and in the terms on the term sheet. companies are doing what it takes to get the money.
Steve with Kentucky Seed Capital: Invests in pharma, some biotech. only $5 million to invest so very early stage, just helping scientitst form and build the company. Downturn has hurt ability of these companies to get the follow on funding they need.
High-Tech companies looking at the Mid-West
Good Article in the Wall Street Journal regarding High-Tech companies locating in Midwest cities. The article focused on Ohio but Kentucky could as well have been mentioned. They key takeaways is that the companies relocate for:
Cost of Doing Business
Availability of grant programs and tax breaks
One area that was not mentioned but in my expereience plays a big role as well is quality of Life in the midwest. There still are challenges in terms of getting the follow-on funding and in Kentucky one challenge is the lack of sufficient seed stage lead investors.
Venture Capital Forum
May 18, 2009
Wednesday, May 27, 2009 11:30 am – 1:30 pm
DoubleTree Suites
2601 Richmond Rd
Lexington, KY 40509
Elizabeth Rounsavall joined Chrysalis Ventures as Associate in August 2007. She provides analytical and transactional support to the investment team for Chrysalis’ three primary investment sectors: media & communications, healthcare, and emerging trends & technologies.
Steve Gailar is President and Chief Executive Officer of MetaCyte Business Lab LLC and managing partner of Kentucky Seed Capital Fund.
Murray Wilson joined River Cities Capital Funds in 1995 following the launch of Fund I in 1994. Prior to River Cities, he was the first associate hired at another regional venture firm for their debut fund in 1992. Murray has been in the industry for nearly fifteen years and has gained experience and perspective from managing growth company investments through several business cycles.
Interview with HBS Professor Josh Lerner on boosting entrepreneurship and fixing Venture Capital
May 13, 2009
Professor Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, with a joint appointment in Finance and Entrepreneurial Management . I interviewed him regarding his new book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It (The Kauffman Foundation Series on Innovation and Entrepreneurship)
1) Dr. Lerner, Your new book is about the failure of public effort to spur VC & entrepreneurship, what was the biggest takeaway from your research?
Silicon Valley, Singapore, Tel Aviv—the global hubs of entrepreneurial activity all bear the marks of government investment. Yet, for every successful public intervention spurring entrepreneurial activity, there are many failed efforts, wasting untold billions in taxpayer dollars. When has governmental sponsorship succeeded in boosting growth, and when has it fallen terribly short? Should the government be involved in such undertakings at all? These issues are particularly timely, given the many billions of dollars governments are spending worldwide to prop up troubled industries from banks to automobiles.
Boulevard of Broken Dreams is the first extensive look at the ways governments have supported entrepreneurs and venture capitalists across decades and continents. I look at why some public initiatives work while others are hobbled by pitfalls, and he offers concrete suggestions for how public ventures should be better implemented in the future.
Discussing the complex history of Silicon Valley and other pioneering centers of venture capital, I highlight the extent of government influence in prompting growth. But I also examine the public strategies used to advance new ventures, point to the challenges of these endeavors, and reveal the common flaws undermining far too many programs—poor design, a lack of understanding for the entrepreneurial process, and problems in implementation. The book explains why governments cannot dictate how venture markets evolve, and why they must balance their positions as catalysts with an awareness of their limitations for stimulating the entrepreneurial sector. (emphasis mine)
2) What guidance would you give to local and state businesses if they wanted to spur entrepreneurship?
First, “set the table”: make sure that the environment is an attractive one for entrepreneurial ventures, looking at everything from technology transfer programs to capital gains taxes. Second, if public funds are to be used, make sure that they are used to match private investments. In this way, the market can shape where resources get spent.
Finally, carefully test the ideas with entrepreneurs and venture investors. All too often, public efforts are unsuccessful because they are not “reality tested” prior to their promulgation.
3) Does your research extend to the efforts by universities and their efforts as a whole to spur entrepreneurship?
Certainly, universities can be an important partner in the commercialization process. But their most important role is as a source of new ideas.
4) Many think the VC industry is in crisis, What are your recommendations for reviving the VC industry?
Many of the issues facing the venture industry is cyclical: we have been in an extended period where it has been difficult to exit investments through the public markets or other means.
But there are other steps which the public sector could and should be doing to facilitate these funds. High on my list would be lowering the costs for public offerings by new firms (e.g., by visiting whether Sarbanes-Oxley should apply in full to very small firms) and increasing the supply of scientific and technical manpower, historically the source of some of our best entrepreneurs, by easing the process for immigration of skilled talent. Addressing the issues with the patent system,where awards have become increasingly disconnected from innovation,is also critical.
3 pitch tips you can learn from Billy Mayes
May 7, 2009
Billy Mayes is the master of direct response marketing ads for things like oxy-clean, mighty putty etc. While checking out his show pitchmen, I was reminded of many bad pitches I have seen over the years. I see dozens of pitches a year and regularly they disappoint and many times don’t live up to the underlying idea which is often a good one. Here are the three ways you can incorporate some Billy Mayes into your pitch:
1) Show some enthuisiasm: nothing kills a good pitch more than a speaker who is unexcited, monotone or overtly nervous. You don’t have to have the amped up volume of Mayes but show some life and passion for your idea.
2) Demonstrate it: Nothing sells your idea or product better than a demonstration. For web/software, have a demo or mockup. If you are in biotech or simply in a field where a demo isn’t feasible than use pictures, charts, graphs. Something to liven up the presentation and visually depict your concept
3) No word clutter: Nothing is worse than someone having their entire presentation written on the slides then just reading the slides to you. If you watch the ads for products Mayes presents, the only written words depicted on the screen are the products name and reiteration of the key point or takeaway. Keep the slides and your presentation focused on depictions of key concepts and have you verbally give the information so he audience is listening and not reading ahead.
Follow these tips and you are sure to keep your audience awake and engaged.
Term Sheet Generator
April 22, 2009
The law firm Wilson, Sonsisni, one of the leading firms in working with start-ups in the country, has launched a free term sheet generator for use. The Altgate blog has the full story but here are some key excerpts:
“The way the tool works is that you answer a bunch of questions (north of 100) and then when you are complete it gives you a perfectly formatted Word file term sheet. Most of the questions are structured as “select from” several options often with an optional to “write your own.” The beauty of having the option to select from “standard” options is that WSGR has included some market data, e.g. what percent of term sheets in up rounds in 2008 included this term.”
“Apparently this is the first of many online document generator tools that WSGR intends to make publicly available on the web. There are three categories (startup, equity financing and bridge loans) so we can expect more to come.”
While a startup will still need a lawyers advice in closing a deal, this is a good tool for the first pass of a term sheet or for angels/vc’s/attorneys to quickly get a full formatted term sheet ready.
Entrepreneurial roadmap
April 16, 2009
Here is the link to my article in Business Lexington on the Entrepreneurial Roadmap. Thanks to Eric Marr for bringing the need for this to my and many others attention. We soon hope to have developed a version for distribution within the community
What might have a Kentucky techstars-style model Looked like
April 2, 2009
In Greenville, South Carolina, a new mentor-driven venture model has been founded called Nextstart. This format and program is very similar to waht we would have had two years ago if we had created the program in Kentucky. The main players for Nextstart are Greenville’s chamber, University and goverment funded seed style programs. The counterparts to this organizations in Kentucky would have been partners in our program. My previous post talked about why I think this model is not the best idea for a Lexington and would stand by that in the case of Nextstart. Greenville is not going to attract the top level talent. They do not have founders like this, this and this, or mentors such as this and this.
Does Lexington (or Louisville or other cities like it) need a Techstars program
March 20, 2009
Two years ago, a partner and I investigated the idea of starting a Techstars style program to Kentucky. For anyone who does not know, The “Techstars style model” is a mentor-ship-driven venture model for seed stage tech startups. The companies (really just teams of good people with a good idea) receive a small amount of cash, a high level mentor-ship experience and a dynamic collegial environment. This is a really novel way to help develop seed stage companies as it focused less on cash and more on mentorship and guidance. At the end of the program most of these startups have gone on to raise follow on funding and many have already been successfully acquired. At the time only two such operations had a national profile, the aforementioned Techstars in Boulder and yCombinator located in Boston at the time. The reason we thought it made sense was the model focused on what new entrepreneurs need most, guidance from those who have been there before and with only two “competitors” the possibility of attracting some of the brightest talent in the country to such a program seemed promising. While we made significant progress towards such a program, a single important issue developed. In both of the existing programs the founders of the program are the sole capital providers and by themselves are significant mentors for these seed stage startups. In addition they had the connections necessary to develop an impressive group of mentors and potential follow on investors to work with these companies. While we had capital and connections and some mentors it became obvious that without the nationally recognized founder as part of the group it was going to be hard to get that critical mass of each component. Simply, Kentucky does not yet have that critical mass and many places that could benefit from this innovation do not possess these critical components yet either.
Fast Forward to today and many people believe that if you build it, this type of “incubator” for lack of a better word, then they will come. However, the landscape had changed dramatically in these two years. Techstars is in Boston as well as Boulder now funding up to 20 ideas. yCombinator has relocated to Silicon Valley and raised some additional capital to allow them to fund around 40 ideas. In Washington D.C. there is Launch Box Digital, In Philadelphia, DreamIt Ventures, BootUp Labs in Vancouver, B.C., Capital Factory in Austin, Summer@highlands in Boston & Silicon Valley and soon to start is The Funded Founder Institute to be based in Silicon Valley as well and a group looking at starting one in RTP North Carolina. Also, Facebook offers its’ Developers Fund which applies the same model for those building on Facebooks’ platform and Google held the Android challenge for those developing mobile apps on that platform. What this means is that entrepreneurs no longer are forced to travel and probably relocate to Boulder or Boston to get this type of assistance. In addition, the pool of available talent with an idea worthy of receiving this help has been diluted. Originally, the best case scenario was that that the top 20 or so would have been funded meaning a group using this model to recruit nationwide would have had a shot at maybe 21-30 best teams & Ideas. With the proliferation of these models, at best you are competing for the 110th best team and idea. This is obviously an oversimplification but highlights the challenge for any group believing the power of the model will overcome a lack of track record and national connections.
The conclusion I come to is this model will only work in new locations where the founders have a natonal reputation and the money to underwrite the program themselves. Essentially, if the person’s reputation is significantly high profile and that will attract people in and of itself. The ability of the novelty of the program to be a draw is diluted when multiple options for this type of assistance exist. Those located in second tier cities would be well advised to look for a new model that is innovative and sets them apart.
UPDATE:
Two other similar programs just launched Start @ Spark funded by Spark Capital in Boston and Shotput Ventures in Atlanta. As I predicted evry large city will have one of these programs started by a group or group of individuals with the clout to bring in applications. It is likley that most entrepreneurs at that early a stage will just apply to multiple programs in hopes of landing in one.
