Unicorns think they’re so great because they’re all mysterious and magical……
Q: What is the difference between the top 5 venture funds and ATR (all the rest)?
A: “That’s where the money is.”
Eight days ago, the fundraising scene was changed when the ban on general solicitation was lifted. For the first time in eighty years, small businesses can now raise funds publicly. Under the new 506c rule, companies who file Form D with the SEC can solicit to the general public. However, no one is restricted to filing Form D if they want to raise money. There is the option of doing it the old fashion way!
Here at Tech-Rx, we are sticking to our time-tested and trusted 506b. There are several reasons we are not jumping the boat, the chief reason being that the alternative is quite onerous. Our first turn-off with Title II of the JOBS Act is that companies are required to take dramatic steps to verify investor accreditation. Investors in 506c deals will need to provide private documents such as tax returns or broker forms to companies they are interested in supporting in order to prove their accredited investor status. I don’t know about you but I try not to make it a habit to release such private information, especially with no guarantee of privacy. (Does anyone else smell unwarranted government intrusion into personal matters?)Our second turnoff is from the standpoint of the company. Companies are required to submit details to the SEC 15 days prior to general solicitation. Do you know anyone who has their presentation materials ready two weeks in advance? It is unheard of!
Lastly, failure to follow strict protocol will result in a one year ban from fundraising. In other words, certain death. A year is a long time in the early stages of a company and a year without funding is even longer.
Amidst all of the craziness of the new rules of engagement, we want to assure you that Tech-Rx is sticking to the traditional methods of fundraising through our accredited investor network.
What are your thoughts on general solicitation? Have you ran across any issues with the new rules?
-Steve Hogan, Managing Partner, Tech-Rx
“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.”
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.
The 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.
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 — firstname.lastname@example.org 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