When considering entering into a partnership or making a private
investment in an early stage company, beware of the “idea
guy”. This is a title sometimes used by entrepreneurial
minded individuals who don’t contribute to the growth of the
company through development, sales or management but develop
concepts (ideas) for products or services for some market
opportunity.
From my experience, idea guys often have little ability to manage
cash flow or people. Without the proper partners in...
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As stated in
Part 2 of
this series, a business’ capital strategy is both
directed by the market strategy and leadership
team required to carry out the strategy as well as
directing to the market strategy and team. A
solid capital strategy is based on understanding where you are and
where you need to go.
The first step in developing a capital strategy is to
know
your revenue projections. If you had the money and
team you need, what can you sell and when? In developing a
market strategy the...
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In the matrix of developing a good business model a business will
have:
- A well developed market strategy;
- The correct leadership team to carry out the market strategy;
and
- A capital strategy capable of funding the market strategy and
team through growth.
Each feeds the other:
Most entrepreneurs are good at spotting a market opportunity but
are weak in developing the opportunity into a market strategy,
leadership (developing the correct team) and capital strategy, yet
each is pivotal in business...
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Over the last three weeks I have visited the west coast twice and
Toronto once to help clients work through funding rounds and
strategic acquisitions. I also visited with two angel
investment groups which I work with. The primary purpose of
each trip was to help clients develop and realize their capital
strategy for growth. While most of these entrepreneur clients
are in technology fields, others include a tax planning firm and a
Bollywood project out of Toronto.
It does not matter what world...
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The following is a guest post by a fellow
Gravity Ventures member and
friend, Dr. Tony Ratliff:
Learning to Pitch Before You Start Raising Capital
By Dr. Tony Ratliff
It only took about six months of deal flow and a handful of
“pitches” before I realized that most entrepreneurs are really,
really bad at “selling themselves” and “pitching” their ideas and
companies to investors.
I cringe every time I listen to a great start-up idea or read a
well-written business plan, and then watch in horror as...
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Determining a valuation for a pre-revenue company is a difficult
process. A Harvard VC formula does not make sense at this
stage as available P/E ratios essentially compare apples to
oranges, cash flow projections are too untrustworthy to use a DCF
method, and there is no such thing as a true market comp.
Investors must rely on qualitative factors in connection to
valuation formulas to determine how much they think the thing is
worth. Some qualitative factors include:
• Is the...
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Angel investment groups tend to quickly dismiss investor
presentations that cover complicated products and markets.
They tend to lean towards investment opportunities which they
easily understand the market – often even if it as a worse
valuation or lower expected return than other more complex products
or markets.
This is a problem for those more complex technology
companies. If this is your company, don’t fret. They
key of any angel investor group presentation is NOT to get them to
commit...
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A tech entrepreneur friend recently told me that the concept of an
“evangelist” in tech companies is all but dead. Honestly I
don’t know if it was ever as alive as people thought, but I liked
where he was going with this. I’ve talked to a number of
aspiring entrepreneurs who view their role in their development
stage company as that of an evangelist. Practically what this
often means is that the person has a entrepreneurial idea but no
ability to either develop it, sell it or run the...
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All securities offerings fall into one of three classes:
1. Registered,
2. Exempt, or
3. Illegal.Private offerings of securities are just that – “private”.
The key for any private offering is that the offerer may only
solicit investors through private methods. There are all
sorts of rules around what constitutes private solicitations and to
whom the solicitations can be made, but in general "private" means
that which is not public. If a business attempting a private
offering makes a...
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Last night I lectured on this topic to my entrepreneurial capstone
class at Purdue. It is possibly the most basic question for
any startup looking to raise capital, but it is often not
approached correctly. In my experience most entrepreneurs
take a wild guess at their number.
The correct approach is to look at your cash flow projections and
determine it from there. For a new startup the goal is to get
to breakeven and beyond. For later stage companies the
projections may address strategic...
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Agreement titles are funny things. In their best use they
quickly describe the general subject matter of the contract.
For most situations a simple title is helpful. E.g.,
"Services Agreement" helps differentiate between a contract for
services and one for goods. That is helpful. Many
contract titles are more descriptive (e.g., "License Agreement",
"SaaS Agreement" or "Software Service Level Agreement" to describe
the technology nature of the agreement).
Where a client is using form...
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I've had several conversations with concerned
entrepreneurs over the last year about changes in the accredited
investor standards under the Dodd-Frank Act. In January the SEC
proposed amendments based on Dodd-Frank to the accredited
investor standard which subtracts the net equity value of an
investor’s primary residence from that investor’s net worth
determination.
Example: Currently if an investor has $800k net equity before
equity in primary residence and $300k in net equity in the...
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In the words of Schoolhouse Rock, “three” is the magic
number. That is not what I am talking about. Every
business model has some number milestone that must be met to ensure
a basic level of success for the business. This can be number
of customers, revenue, user seats, market share, marketers’
requirements, sales reps, break even...
Good market research can predict this number. Unfortunately,
most business plans either ignore the number or use wild a**
guesses (WAGs) to predict the number....
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I have said it a million times since learning the lesson myself in
a failed entrepreneurial effort a couple of years ago, the CEO of
any entrepreneurial venture must understand the importance of
managing cash flows and how to use cash flow analysis for the
strategic growth of the company.
Trust me, I am all into the Six Sigma approach of throwing a couple
of innovators together, rolling out a v1 product as quickly as
possible, and slowly scaling the company from hobby phase to a
successful...
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It has been said a million times already on this blog – a CEO,
especially one which is seeking funds from private equity
investors, needs to understand finance. Often a basic
knowledge of sources and uses and cash flow analysis is enough, but
in many early stage investment rounds, savvy investors expect the
CEO to know the company's internal rate of return (IRR) - and
why it matters.
I meet many entrepreneurs who have served as VPs or middle managers
before embarking on their entrepreneurial...
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The last couple of years have been strange. With the change
in the economy, many early stage companies are looking for anybody,
and I mean anybody, to invest in their capital round. As the
economy rebounds (which we are seeing in technology markets)
business owners are again able to be picky when considering angel
investors.
An angel investor (or an angel investor group or private equity
firm) should be more than just a liquid wallet. He/she
should be a strategic member of your team. They...
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Next week I am moderating the plenary panel at TechPoint’s
Innovation Summit entitled
Funding Innovation.
Check it out:
TechPoint
Innovation Summit
Also check out the
sponsors page. I
counted today, and
nine Alerding Castor
Hewitt clients are sponsors of the Summit. That is
awesome.
This year’s panel members represent private equity investors, angel
investor groups, successful entrepreneurs and grant funding
organizations which look for funding and investment opportunities
in Indiana...
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So I have been a bit behind in blogging these past few weeks.
With the new addition to my family (my 3rd son), life has been
hectic. But, I am back and ready to role.
As a general update, Alerding Castor Hewitt continues expand as
technology legal counsel in SaaS law, funding law and
entrepreneurial law fields. We have some exciting new
Internet-based and SaaS clients. This month we helped a
client negotiate a stock purchase deal and have handled no less
than thirty SaaS or software licensing...
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I guest lectured at Purdue’s Entrepreneurship Capstone course again
last week. I love it – for an hour I talked about my
experience in entreprenuerial law, business law and funding law to
Seniors in Purdue's entreprenuership concentration program on
issues consider when structuring a new company. Honestly, I
thought I had them bored out of their minds (yes, there was that
one Greek letter wearing frat guy who was asleep about 10 rows
back), but I was impressed when we got to the Q&A time...
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Today I am preparing for a guest lecture at Purdue University's
Discovery Park this week on developing business plans and my
experience as an entrepreneur. I read a lot of business plans
- about 100 per year, and I also help draft business plans and pro
formas for business law clients and my own companies.
Here are some general guidelines to consider when developing a
business plan:
1.
Write to the intended
audience. Is the reader the leadership team or
potential investors? If to...
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David is a founding partner of Alerding Castor Hewitt, LLP, an Indianapolis-based law firm designed to serve and partner with businesses and their owners through their business growth. Alerding Castor Hewitt, LLP strives to be Partners in Success with its clients. David's practice focuses on representing Software as a Service (SaaS) and technology-based businesses in licensing, global private equity, and entrepreneurial law matters. He has substantial experience in areas of transaction negotiation, private equity offerings and capital structuring, legal technology consulting, mergers & acquisitions, entity selection, trademarks, and shareholder and LLC membership issues.
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