Bloomberg Business Week Talks About Tech-Rx

These types of posts are becoming alarmingly common! It is becoming more and more obvious that Venture Capital is not able to further fund all the startups that were angel-funded, resulting in a lot of stranded good technology. Read the entire article here. “Last week, Andreessen Horowitz co-founder Ben Horowitz wrote in Fortune that in the current climate for raising venture capital, startup founders should swallow their pride and embrace the “down round.” That is, founders running out of cash may need to raise more capital at lower valuations than in previous fundraising rounds:

“Hoping that the fundraising climate will change before you die is a bad strategy because a dwindling cash balance will make it even more difficult to raise money than it already is, so even in a steady climate, your prospects will dim. You need to figure out how to stop the bleeding, as it is too late to prevent it from starting. Eating s— is horrible, but is far better than suicide.”

Herewith, more musings on investors’ appetite for startups in peril from around the Web: Wired’s Ryan Tate found fodder in Horowitz’s column, noting in a piece on the “screams of crushed startups” that Silicon Valley is walking into the business end of the Series A crunch. In recent years angel investing has increased, helping more startups launch. The pool of venture capital available to those companies hasn’t kept pace. Thus situations like the one described on the blog My Startup Has 30 Days to Live, and thus this nugget from Tate’s piece:

“At least one firm, Freestyle Capital, is setting up a bridge program to help early stage startups reach their next investment round, with the bridge investing up to $1 million into sufficiently promising companies so they have more time to find new investors.”

That sounds like what Reuters blogger Felix Salmon meant when he took note of a “very, very new market” in “distressed startup opportunities.” Salmon was also writing in response to Horowitz’s column, though the distressed startup he had in mind was the subject of another article, this one by David Segal in the New York Times. That piece was about an entrepreneur who gave up equity in his company in return for help combating a patent troll. Maybe Salmon overstates how new the phenomenon is. This week, PandoDaily’s Erin Griffith profiled a startup investor named Steve Hogan, whose firm, Tech-Rx, sounds a lot like a private equity turnaround shop:

“This isn’t about creating the next Facebook (FB). Once a company reaches him, it has already missed that opportunity. No, the ultimate goal for each situation is to sell the fixed-up companies in two to five years. The fact that this plan includes minting a solid return for his network of angel investors doesn’t hurt the cause, either. If successful, he’ll achieve at three-times to five-times return in that time frame.”

Another take at "what failing startups have in common" on BusinessInsider

What failing startups have in common seems to be a popular topic. After seeing Erin Griffith‘s post on Tuesday, Business Insider‘s Alyson Shontell agreed on the reasons of what failing startups have in common. Read the full article below or check it out on Business Insider. “Steve Hogan has a special job in Silicon Valley. His firm, Tech-Rx, is hired to save startups that are circling the drain. PandoDaily’s Erin Griffith interviewed Hogan and asked him for the most common reasons startups fail. Surprisingly, running out of money wasn’t cited as reason number one. It’s third. Instead, only having one founder is the most common reason Hogan says startups die. Running a company alone is much harder and more stressful than it seems, and it’s especially unusual for a startup to succeed with just one person behind it. Reason number two: forgetting to ask, “Who’s going to buy this?” before launching. Freemium models are often the fall-back business model, but if a founder doesn’t have a truly amazing product, no one is going to buy an upgrade for it. “Unless you can get paying customers, you are probably going to die,” Hogan tells Griffith. Finally, running out of capital is a sure way to kick the bucket. Hogan says he sees a lot of startups get 90% of the way there then run out of cash, and it’s often because they didn’t raise enough during their last round and plan for enough runway.”

PandoDaily asks, "What do failed startups have in common?"

Yesterday, PandoDaily posted an article titled, “What do failed startups have in common?” As a result, there was a lot of interesting feedback, but for the most people agreed on the number one reason. One of our partners, Steve Hogan, is quoted throughout the article on startup failure commonalities. Read the article below or check it at PandoDaily! “Steve Hogan has seen a lot of startups struggle. His firm, Tech-Rx, aims to save as many of those as possible because, in his words, “all innovations are ultimately good for society.” We published a profile of Hogan and his firm yesterday, find it here. The top thing failed startups have in common, Hogan says, is that they’re sole founders without a partner. “That is the single biggest indicator of why they got in trouble,” he says, adding that it’s especially common for sole first-time founders to fail. The second biggest factor? No one looked into potential buyers before they built the product. He’s not talking about exits — he’s talking about customers. Founders don’t ask themselves who is going to pay money for the product. “We see lots of freemium strategies,” he said. ”Freemium is freemicide. Getting someone to upgrade from a service that is adequate and free never works.” Which is sort of the point. “Unless you can get paying customers, you are probably going to die,” he says. The third most common factor is that the company ran out of time. “They got 90 percent of the way there building their product and they ran out of money,” Hogan says. An engineer since 1968, Hogan knows the tendency of engineers to underestimate how long it will take to build something. He often sees companies in desperate situations because they didn’t give themselves enough breathing room with their initial fundraising. As an addendum to that one: Hogan believes founders often misinterpret Minimal Viable Product, a philosophy which decrees that software — no matter how bare bones — is shipped early and updated often. The startup philosophy is so revered by entrepreneurs that entire companies are being built around it. But it can be dangerous to young startups that have one chance to make a positive impression on users. Often founders have a different idea of what minimum viable product is for consumers compared with what it is for them. The people building the app get into the mindset that they are the typical customer for the product, assuming that if they understand it, all customers will understand it. That’s rarely the case. And focus groups aren’t enough to go on either, Hogan says. “Look at the Groupon Superbowl commercials. The focus groups loved it, and they almost got burned at the stake!””

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See us on PandoDaily!

Erin Griffith from PandoDaily wrote a glowing editorial piece about what we do here at Tech-Rx. For your convenience, you can read the entire article below: Odds are, your startup isn’t going to be the next Facebook, Google, or even Instagram. Odds are, your startup will lose money for your investors. If we’re really being honest, odds are your startup won’t even survive. And yet, startup fever has captured the imagination of the mainstream. Blame the lore behind movies like “The Social Network,” or wantrapreneur reality shows like “Silicon Valley.” Or perhaps it’s pure and simple money-lust mixed with the millennial ethos of following your passion. However it happened, suddenly everyone’s got a dream and an app. And everyone who doesn’t is an angel investor. We’re even exporting startup swag by the box to startup fanboys around the world. Eventually, something’s gotta give. Most recently that “give” has taken the form of the so-called Series A crunch. At PandoDaily, we’ve argued that a survival of the fittest-style thinning out of startups can be a good thing. The tech world is overheated with boring, derivative widgets, FNAC ideas, and apps. Not every one deserves a gold star. But for every 100 cynics who have seen too many pitches for the latest subscription-photosharing-SoLoMo-crowdfunding app, there’s a contrarian believer who wants to save good ideas from bad execution. Operating under the radar in Silicon Valley is a network of experienced founders and builders who’ve made their names turning around ailing startups. They’re hired guns, parachuting in at the eleventh hour to rescue a dying company. Until recently, they’ve operated mostly independently in their own networks. But last year, entrepreneur and tech executive Steve Hogan formalized the operation. The result, a firm called Tech-Rx, is Silicon Valley’s first turnaround shop. *** Hogan is the kind of guy that puts you immediately at ease, like a jovial favorite uncle. It’s an important quality to have when your line of work consists of demanding founders hand you control of their beloved companies. Even when doling out searing criticisms  of startups, Hogan’s candor is unflappably positive. He’s been around Silicon Valley since 1968, when he took his first engineering job, and has the war stories to prove it. He also invested some of his earnings in a few VC funds. By those bad survival odds I described before, most of the companies his funds backed in did not survive. And yet, watching so many of them fail didn’t sour him on startups. It made him even more hopeful. “Our mission [at Tech-Rx] is not to make these companies go away,” he says. “It’s to try to get them on the path to salvation.” He’s a believer in the Silicon Valley promise that innovation drives society forward. His job, however, has a slightly more sinister connotation. As he described, the way Tech-Rx works with companies, I couldn’t help but think of Jonathan Banks’ chilling character Mike in “Breaking Bad.” Mike is the guy the drug lord calls to clean up a mess every time Walter White and Jessie find themselves in a pickle. Dead girlfriend? Wife causing problems? Each time, Mike shows up with a pair of gloves and a gym bag full of the right tools. A few hours of discreet, methodical work later, and the mess never happened. This archetype isn’t unique to “Breaking Bad” — the The Wolf character in “Pulp Fiction” plays a similar role. Pulp_Fiction_mr_wolf_consultant With slightly more noble motives than his fictional counterparts, Hogan has been acting as a startup fixer-upper in various forms for the last few decades. Over the course of his career, he’s founded and sold two companies (including telecom company LinkUSA), acted as CEO of five companies that sold, and directed turnaround efforts at another 14 companies, 11 of which sold for a respectable return. (Three, he says “died miserable deaths.”) According to Frank Vargas, a Partner at Rimon Law Group who’s known Hogan since he worked as a VC lawyer at Wilson Sonsini in the 80s, Hogan’s experience as an operator sets him apart from Six Sigma ninjas fresh out of business school, slick private equity pros from Wall Street, or VCs that haven’t built companies themselves. “You have to really understand how a company works to fix it really quickly. To learn that, you really have to have operated,” he says. “That’s what these guys have is the experience. That’s what makes them good.” Hogan decided to formalize his turnaround services last year, creating a network of 12 industry executives to save failing startups. In addition to his twelve partners, he’s raised a fund of an undisclosed size from a large network of angels to financially prop up the companies. The idea of a turnaround shop isn’t new — there’s a whole category of turnaround investors in the private equity world. But Tech-Rx is the first one focused on tech, run by tech operators. Its mission — to sustain innovation — is as Silicon Valley as it gets. Since launching Tech-Rx officially this winter, he’s struck deals with two companies with a dozen more in the pipeline. The company doesn’t disclose its investments because of the possible negative signal — it is not often publicly known that its companies are in trouble. Not to mention, VC’s rarely want to openly discuss a portfolio company that’s in trouble. “When that occurs, they drop them off their website until they either die or are cured,” Hogan says. This isn’t about creating the next Facebook. Once a company reaches him, it has already missed that opportunity. No, the ultimate goal for each situation is to sell the fixed-up companies in two to five years. The fact that this plan includes minting a solid return for his network of angel investors doesn’t hurt the cause, either. If successful, he’ll achieve at three-times to five-times return in that time frame. Venture capital firms start out aiming much higher over a longer period of time, but few of them actually do it. If Hogan manages to hit that target, he’ll beat the pants off of the actual average returns for VC funds Now, around 20 companies approach Tech-Rx each week, many of which are not in true distress, they’re just “Series A Crunch victims.” They are the zombies of Silicon Valley. They’ve got enough cash — or, in some cases, revenues. They don’t need to shut the doors immediately, but there’s no more cash coming to take them to the next level. Tech-Rx is most interested in companies that are on the brink on death — weeks or even days away from the deadpool. Typically they’ve raised between $1 million and $5 million to build a product that hasn’t gotten much traction. Their investors aren’t willing to put in more money, and they can’t find a buyer (though Yahoo seems to be singlehandedly changing that trend). Hogan and his team assess the situation within two days. They first check whether the top talent has stuck around. “We have to make sure the crown jewels are with the company,” Hogan says. “We can’t do much, if it’s just a bunch of worker bees and fed up investors.” Similarly, the “attitude and integrity,” of the remaining team is a big factor. Tech-Rx recently pulled out of a deal on the day of the signing after the founder made a casual remark about walking away if it didn’t work out in a few months. Then Hogan’s team examines financials, which are often sloppier than you’d imagine for young, money-losing companies, he says. Lastly, they assess the landscape of potential buyers. If there are no logical buyers in sight, Tech-Rx won’t step in. When the firm does step in, it offers terms that are slightly more benevolent than a company would get in a cram-down round, where the white knight will take 95 percent of the stock, simply because the company has no other options. Tech-Rx invests between $500,000 and $5 million into companies, taking 50 percent of the common stock, offering 20 percent to any new management it brings in, and leaving 30 percent for existing shareholders and founders. That’s usually a relief to investors, Hogan says, because there is still hope they’ll at least get their money back. By this point, they were expecting a big zero. From there, Tech-Rx calls on its network of partners with expertise ranging from software to biotech, pharma, and hardware to fix things up. While he’s at it, Hogan has taken a stab at re-inventing venture fund structures, too. Hogan structured Tech-Rx’s angel network as a restricted angel fund rather than a traditional 10-year venture fund. He was burned on investments in four small venture funds, three of which returned zero capital (the other returned .18-times). The funds he backed went off-target from their initial strategies, as firms are wont to do when they have 10-year life cycles. As Hogan is helping failed companies find salvation, it’s almost as if he’s also getting his own redemption for those failed VC investments. “No one likes the fund model anymore,” Hogan says, joking that many of his angels are older investors and want more liquidity. “If we get into a 10-year fund, half of these people will be dead by then,” he says with a laugh. So Tech-Rx is structured as a restricted angel fund. Investors are in control of their individual equity in Tech-Rx companies and can choose whether to invest in each company. They write $20,000 or larger checks, and they’re conditioned to make a decision in five days given the urgency of most turnaround situations.

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The ACA Warns the SEC

In a recent article by Silicon Valley Business Journal‘s Cromwell Schubarth, an unexpected consequence to last week’s SEC decision has been unearthed. In response to last week’s decision to end the ban on general solicitation, the Angel Capital Association issued a warning. The group warned that many of its thousands of investors will stop investing if forced to submit financial documentation to verify their accreditation as investors. This is an example of another well-meaning but unrealistic program. Contrary to the original intent of the JOBS act, this may be a detrimental repercussion to the startup community. Read the full article here.

What Makes YOUR Company Stand Out?

BUSINESS PLANNING SERIES

Previously, we wrote about one of the most common – but almost always fatal – errors that we see in business plans – Incorrect Positioning vs. The Competition.   Today we hope to give you some ideas about how to better present your company in a way that truly stands out.

Repeat this 10 times: “We MUST dramatically, effectively and persuasively contrast our company against its competition.”

Not very catchy, I admit, but true nonetheless.

Blog Head PlanningThe point is that you MUST ACTUALLY SHOW investors that your new product is so unique, so compelling and so relevant to your target market that you will displace and even eradicate your competition.  (I guarantee you that your competitors will fight back.  Plan for it.)

Here’s what we want to hear you say and what you need to truly believe —

We’ve carved out a niche. One specific enough that no one is currently targeting.  Company G or F or Y might be in this space but they are not hitting this niche because of X and it is hard for them to move into this niche because of Y.  In fact, G, F and Y are potential partners or possible acquirers (it’s never too early to be thinking about an exit)  because your idea is similar but out of their reach.

We’ve identified a market too small for the established companies but big enough for a compelling business. (Big Enough ≧ $100 Million) Because the big players are too inefficient at building [whatever you build that is so special], they choose to ignore this market.  If you believe that you can build a solid business in this market and can show good growth AND profits, might you not be an obvious acquisition target.

Our technology is so different that we’re changing the conversation.  Although your solution may be technically complex, it must be easy to use and just as important, easy to describe.  For example: how Netflix changed the way people watch movies at home.  (Two times, by the way.)

Our target customers have historically solved this themselves or just lived with it.  New technology makes your product possible.

New technology and modern thinking make this the right time.  (iPhone = Right Time; Newton = Wrong Time.)

This industry has never seen a solution like this. It was previously impossible to address the market this way BECAUSE –

  • It takes an incredible team.  (We talked about this before – Dream Team – but it never hurts to make the point again.)
  • New hardware/technology now makes this possible. (But be prepared to talk about why YOU are the best company to implement this new stuff.)
  • New attitudes enable new workflows.  (Google docs, Facebook, etc. now universally used by non-Geeks.)
  • This now-commoditized industry makes the slightest edge a big deal.  (Be prepared to talk about how you will stay ahead of competition.  Remember, “Anything worth being copied will be copied,”)
  • This industry is just now showing signs of embracing new technology.  (Remember, “Anything worth being copied…..”)
  • We have three lead customers signed up as alpha testers.  (When you enable customer success, they will become your best evangelists.)

So now you can effectively contrast yourself against the competition without letting them define your identity.  In fact, you may have just morphed your competitors into potential acquirers! Very cool! Investors love that.

Tune in next time and we’ll talk about another Fatal Error – No Real Path to the Customer aka If You Build It, They Won’t Come Without Your Help.

 -Steve Hogan

Everyone Loses with New SEC Ruling

Yesterday, the Securities and Exchange Commission (SEC) ruled that startups can begin publically advertising their securities. This new ruling affects investors, journalists and startups alike. While journalists will see their already saturated inboxes take on a whole new meaning of full, startups will have a harder time being noticed amidst all of the noise. What does this mean for investors? While the SEC still needs to rule on whether or not non-accredited investors can legally invest in private companies (and that will open an entirely different can of snakes), this new ruling only affects accredited investors for now.

Our take on this —

Discovery = More Work

Forget that startups will have to invest more energy in obtaining press, energy that could be used toward working on the operating part of the business. There is going to be a tidal wave of startup fundraising press releases. While journalists are already beginning to bolster their inboxes, investors should begin preparing as well. As soon as startups find out your identity as an investor, it will be the decade of telemarketing all over again. Spam-o-Matic at its finest! Not only will you have an absurd amount of startup pitch decks, but how will you determine the diamonds in the rough? With so much noise, it will be difficult to tell the frogs from the princes.  I think I will need a new email address — donotsendyourbusinessplantosteve@tech-rxventures.com  Better yet, some sort of inbox plugin to automatically scan through the plans and flush those that make one or more of these Common-but-Fatal Errors.

Cap Tables and “Activists”

Cap tables in early-stage companies are frequently ugly, but they are about to look a whole lot uglier. While it may not be your job to manage the cap table, a cap table that is longer than a resume is ultimately not fun to work with. The number one issue of a lengthy cap table you face as an investor is that you are unlikely to know the other shareholders and their decision making habits.  While many of the investors will likely be itty-bitty shareholders who aren’t actually paying much attention to the company – essentially playing the numbers game and hoping for a reasonable exit or putting money into their brother-in-law’s new venture just to keep their wife or husband happy –  and others will be truly supportive of the company, all it takes are a few trouble-maker shareholders to ruin the party for everyone.  And its a safe bet that there will be opportunists who will buy into a deal, become troublesome for management and/or the other shareholders, and then offer to sell their shares back for a “small” (500%) profit.  Management and the other shareholders will be only too glad to pay off just to get rid of this “bad money” and let management focus on the company.

Poisoning the Well

This is a problem for the company trying to raise cash.  One of the biggest advantages of pitching your venture to a few investors at a time, especially for first-time entrepreneurs, is that you get to screw up incrementally i.e. you can polish your pitch based upon the feedback you receive.  On the other hand, when you go straight to broadcast, and fail to tell your story well, EVERYONE will have heard you and no one will listen when you finally do get your pitch refined.  That’s why God invented focus groups. Getting feedback from small groups and refining your product is not foolproof (Ref: Groupon Super Bowl) but it is a lot more likely to get results than opening simultaneously in theaters across the country (Google “Disney Lone Ranger”).  Entrepreneurs have a tough-enough time raising capital as it is.  There will be plenty of naysayers. They shouldn’t poison the well themselves.

Good Intentions, etc.

The JOBS Act was created with the intention of helping new business, growing existing ones and creating jobs.   Noble goals.  We fear, however, that unthinking folks may do more harm than good to themselves and other as this volatile and noisy process evolves.

What do you think? Are there ANY winners?

-Steve Hogan, Managing Partner, Tech-Rx

 

Required Reading for Entrepreneurs

Here’s a GREAT POST from Brad Keywell, co-founder and Managing Partner of Lightbank Ventures and co-founder of a few well-known start-ups (such as Groupon), wherein he talks about a book that should be required reading for entrepreneurs. In my humble opinion, it should be required reading for everyone, especially our “leaders” in Washington.  Brad says that this book changed his life.  Your thoughts? -Steve Hogan

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Send me a note at nikki [at] tech-rx [dot] com — we always value feedback!

 -Nikki Griggs, Business and Marketing Associate, Tech-Rx