Start-ups

Our best year ever

2005-12-20T15:04:00.000-08:00

We just published our investment activity for 2005. Wow, what a great year to raise angel funding. We invested more than $7 million in 20 companies. I will say that one investment was a VC investment, but most of the capital came from individual angel investors. Typically, you expect angel investing to ultimately buoy VC investments. The thinking goes that as angels help companies with their seed or series A round, a year or two down the road that company will attract VC investment.

To put this into some perspective, 1999 is widely viewed as a fluke in the terms of investment dollars put into play. As you may remember, the huge dot com meltdown occurred in early 2000. Anyway, this year we have invested more dollars in more companies than ever before and put 1999 in the dust. This is a great time to raise capital if you are so inclined as an entrepreneur.

Beating the bushes

2005-12-19T14:16:00.000-08:00

There are really two ways to find deal flow in the investment world. The first, and quite honestly the easiest, is to put a sign up that says "we invest in start-ups" and see who sends us their business plan. As an angel group, we get several hundred business plans a year. Venture capital groups typically get thousands. I believe we would get more, but we make entrepreneur write their executive summary in our format (that extra step scares away the lazy). As you can imagine, most of the submissions we get this way are crap. A few diamonds in the rough make i through, but they are few and far between.

The other is to go out and beat the bushes to see what comes out. In the words of the industry, this approach means "kissing a lot of frogs" to find the prince. It means cultivating a network, trusting your contacts, and spending enormous amounts of time building relationships. The payback? Great deals come through this format.

Typically I go to known networking events to find these kinds of deals. I also spend time on the phone with associates asking "have you seen anything interesting recently?" or sending them companies that I find that are interesting. Today I tried something new. The jury is still out on its effectiveness, but it has potential.

I saw an ad in Craigslist for a networking group that meets downtown. There really isn't a topic for this group, the headline was "bring business cards and meet other professionals". I was skeptical about the setup, and was prepared for anything when I went to the coffee shop meeting someone named "Sue". I must say, that these organic, self-selecting ways of meeting people are quite interesting. No leads came out of this, but I was surprised at how much I had in common with the group. One attendee works for a company that is considering partnering with my group (though the two people didn't know one another). The organizer, Sue, is actually a potential reselling for the medical device company we're working with. In the spirit of "giver's gain", I think the hour was well worth my time. My call to those interested in angel investing and entrepreneurship is to network, network, network. That'll make it easier for me to find you.

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I spoke with an angel

2005-11-08T13:42:00.000-08:00

I spoke with an angel investor this morning.  A few new things I learned, and a few things I solidified.  Among others, he did pretty well investing in Starbucks as a private company.

Here is a common scenario:  Entrepreneur has an idea.  Entrepreneur researches idea.  Entrepreneur sees dollar signs.  Entrepreneur gets greedy, wants to make a ton of money.  Entrepreneur has no money.  Entrepreneur needs money to make money.  Entrepreneur pitches to Angel investor.  Entrepreneur thinks of investment as a loan.  Entrepreneur treats Angel like speed bump.

These entrepreneurs are rarely successful.

Here is a scenario that’ll help you get funding:  Entrepreneur has idea.  Try as they may, entrepreneur realizes he/she needs Angel investors to start the company.  Entrepreneur realizes Angel has thousands of investment options.  Angel knows that investment could (and likely will) return $0.  Entrepreneur will do everything in their power to make it so that angel will get more than $0 in return for their troubles.

No investor ever complained about receiving “too much” of the upside.

InvestorForum

2005-10-19T09:32:00.000-07:00

I spent my afternoon Monday at the Preston Gates & Ellis law offices hearing a phenomenal panel talk about trends in Enterprise Software.  Before entering life in the start-up investment world, I was a software consultant and built several custom products for enterprise customers.  So I loved it when my job was to sit in this room, listen to smart insiders talk about the future of enterprise software, then go up and chat with them afterwards.  Some of the better quotes were “Open Source is a sociological trend”, “Web Services are a figment of people’s imaginations”, and “it’s all about relationships”.

From the CIO perspective, I found it interesting that 1) CIOs are no longer champions of products, the individual business units are, 2) the CIOs really want to see smaller incremental pieces – not large scale deployments, and 3) software has always been designed around processes rather than how people really do their work.  In other words, while an enterprise may go through a “process” for how work is done, people tend to focus on one area and do value additive tasks.  Most products on the market today are focused on work flows.

Another big theme was Open Source (and even outsourcing).  Most CIOs and entrepreneurs were in agreement that anything that is common or a commodity could and should be built in an Open Source environment.  Anything that adds value, or lends itself to competitive advantage, should be proprietary.  Geoffrey Moore has a great slide deck available about this.

Goin' to Pitch School

2005-10-05T16:45:00.000-07:00

I taught a class on how to make a 10 minute pitch last night. Each time I teach this class I feel better about the world. The entrepreneurs ask good questions, take detailed notes, and act as though they really understand the components of a good fund raising pitch. People even write comments that are going back to the drawing board in order to work really hard to make a
good presentation.

As soon as I stand on top of the world, though, I'm reminded that this is the planet Earth and the inhabitants are human. After the class one entrepreneur tells me:

"I have 250 markets I can go after. In my business plan it states 'upon receiving funding I'll pick the market to sell to'".

That funding is going to be a long time in coming.

Two Spinouts

2005-10-03T11:46:00.000-07:00

A spinout is when a company takes a business unit and launches it as a completely separate company.  Some larger name spinouts include Coca-Cola Enterprises (the bottling arm of Coca-Cola) and Expedia Inc (launches from within Microsoft).  From a large company perspective, spinouts make sense because it removes an emerging company from the corporate bureaucracy, as well as enables the young pup to establish its own brand identity (which may be at odds with the parent).  I often laugh, though, when small companies have spinouts.  Last week we ended with two start-ups coming through that were essentially spinouts of another start-up.

VisionA:  These guys are a spin out of a fingerprinting company.  Fingerprinting company?  Yes, they have contracts with the Department of Homeland Security and the FBI and make a lot of money.  Guess what the spin out is?  They have taken their technology and applied to medical imaging.  Who knew that looking at finger prints and cancer would be the same thing?

SilkTouch:  Almost exactly the same as VisionA, except focusing on strokes rather than cancer.  What is interesting about this group, though, is that the management team is exceptionally savvy in the medical instrumentation space.  They are a virtual company that has licensed all the IP necessary to create their product from other sources – they built nothing themselves.  It’s a nice position for them because they can pick “best of breed” technologies and change direction on a dime rather than a group based on internally built IP.  What the team really brings to the company is the connections to the purchasing channels – they know how to sell medical devices.

All over the place

2005-09-28T11:27:00.000-07:00

This week is a banner week for the entrepreneurs. Most of the companies I've met with our keepers. Here are my insights:

HouseNet: These guys built a web service that allows major financial institutions (think Goldman Sachs or Bank of America) to trade Mortgage Backed Securities electronically. Apparently, these are traded ove the phone now - no electronic platform exists. While I find this hard to believe, the entrepreneurs claim it is true. What I found really interesting about the product, though, is that currently there isn't even a real time list of Mortgage Backed Securities available, you have to contact each supplier directly (there are 16 suppliers in the U.S.). This group was able to get feeds from all 16, so if nothing else they are the only place where you can get up to date info. Goodbye, Arbitrage.

SuperiorHealth: The one downer of the week so far - this group isn't ready for investment. They have a product that monitors your "health" as defined by heartbeats/rhythms over time. The product doesn't really exist though, and to use it you must 1) connect this to your ear, 2) connect it to a USB drive, 3) connect to the internet, and 4) hang out in this position for a while, and potentially even have to stand up a few times. Their real down fall is that they don't know their customer well and can't articulate who would buy this or why (but they do say they have a $66B market to exploit).

GroupThink: I liked these guys. They have built a product (think MS Project lite) that sits on top of API's of tools like groove and sharepoint. It's a collaboration tool that works for teams that are both online and off. In a time of outsourcing, this makes a lot of sense. The entrepreneur is sharp as well. He's had two successful start-ups which he's sold, plus he knows it's best to make a product that integrates with Microsoft product, not that competes head on.

cTalk: I've been waiting to see a company like this for a while. A group of EE PhD's has come up with a new way to manufacture chips (CPU's, memory chips, etc). The founder says that a company like Samsung could either spend $2B to build a new plant, or could license his technology for $5M and do the same thing. What I like about this is that the founder is smart enough to know that he'll never attract enough money to build a new semicondunctor fabrication plant, so he'll build a small amount of working prototypes, license the IP, then collect royalty streams for a while.

OldThymeFun: Still in the idea phase, but this company plans to resell state sponsored gambling products (think PowerBall and Lotto) over the internet. The president is very clear, "Selling lottery tickets over the internet is illegal", but they're taking a bet, pardon the pun, that it won't be illegal for much longer. This is big money by the way. North Carolina is about to launch their own state lottery service, and South Carolina is expected to lose $300M in revenue a year because NC residents won't drive south to buy lottery tickets anymore. While this whole idea comes complete with huge regulatory risk, it is a winner-take-all market in each state (41 states have lotteries), so the upside is very attractive.

So, four for five this week. Some of these might even get funding. All told, I'm happy with the group.

Money

2005-09-23T15:30:00.000-07:00

My faith in the system took a big hit this week. With electronic transactions, high speed internet, and automated processing, performing simple financial tasks should not be hard. I mean, really, companies even have programs to verify if other programs made mistakes. Three huge problems plaugued me this week, and it's making me sick. I have affectionately called these problems "Money Hoarding", "Money Misplacing", and "The Refund Takeback".

Money Hoarding
We're buying a condo and need to come up with a down payment. We have the funds to do so, but they are all kept at Charles Schwab. We tried to move our funds to our checking account so that we could write a cashier's check at closing. The process was extremely frustrating, as Schwab did everything in their power to limit our access to funds (which really sucks because I've enjoyed working with Schwab for years). The whole thing caused huge headaches. We called the company 7 times and got 7 different answers on how to move money around. Ultimately, the funds got transferred to our account AFTER we needed the money for closing. The story did end well because we took a massive cash advance from credit cards to make the payment, but what a pain. To make matters worse, after getting the money to us late, Schwab charged us $20 for the "check costs".

Money Misplacing
For the second time in as many months, Sallie Mae (the student loan company), failed to credit my account for checks I've sent them. Here is the breakdown of events:
1) Student loan due in August
2) I write check for payment amount
3) Sallie Mae cashes check
4) Sallie Mae sends me a notice that my September payment is double because I didn't pay August.
5) Check bank statements - I did pay for August
6) Call Sallie Mae, they say I must send in cancelled check
7) Call bank, get cancelled check
8) Send cancelled check to Sallie Mae
9) Pay double on student loan for September anyway, because I'm buying a condo and don't want any bad credit reports issued about me.
10) Sallie Mae credits me for August
11) Sallie Mae cashes double sized check for September
12) Salle Mae sends me invoice for double payment (again!) because they never received my September payment.
13) Check bank statement - I did pay for September
14) Call Sallie Mae, super angry because they're doing it again
15) Sallie Mae says I need to send in cancelled check again.

GRRRR!!!! Figure it out, people!

Refund Takeback
My son was born in April. The hospital sent me a bill for $3K. I pay bill. Insurance pays their portion of the bill. Hospital sends me a refund for $2K because they overbilled me. Then, this month, they send me another invoice saying that they gave me too big of a refund and they need $1,700 back. Is this even legal? For crying out loud I paid my invoice, can you bill twice for the same invoice? That's gotta be mail fraud or something.

Anyway, all these systems that are supposed to make life better all broke at the same time. What's sad is that this happened before Katrina.

Home Printing Innovations

2005-09-16T13:41:00.000-07:00

Saw ZoomAlbum the other day. This is one of the rare cases (and I do mean rare) where a description of the product doesn't do it justice - you really have to see it. Basically, you print 12 pictures on their special paper from a regular home printer with their software. Then, through a series of twists, folds, and peels, you got yourself a mini 3x3 photo album. It is quite handy. You can decorate the album cover as well. Soon, you are supposed to be able to buy the product from their website or, starting November 1st, at Michaels.

From an angel investing perspective, they got some good things going for them: Experienced management, patents, low raise + pre-money, and a purchase order from a major retailer.

Malfunctions

2005-09-02T13:33:00.000-07:00

I was finally able to synchronize my Dell Axim x30 pocket pc to my work computer on Wednesday. I even got AvantGo configured to download news and weather to my pocketpc so that I could read about current events on the bus ride home. Wouldn't you know it. The hard drive goes kaput the very next morning. I had to move machines and blow half a day getting access to the network, finding my emails, reviewing backups, etc. All this so that I can move back to a different machine once my hard drive is fixed. Grrr.

Four Others

2005-08-19T12:14:00.000-07:00

In my ongoing saga of meeting with entrepreneurs, here are my "post meeting thoughts" on the most recent four I met with.

The first company was a equipment supplier to the armed forces. In today's market, there is pretty good money to be earned in this space. So, they submitted their summary to our group (if you remember from previous postings, we help entrepreneurs get start-up funding). Our operating assumption is that if you submit to our site, then you are actively seeking money. I sent him a request on Monday to meet with us on Wednesday. Being a regionally contained group, this usually isn't hard for people to do - two days is sufficient. His entire response to my email was "other than the obvious need to find a new date". What does that even mean? People view our firm in one of two ways - speedbump or god send. From his email, I'm assuming he thinks of us as the former. We're not ogres, if you have a client meeting or such, we'll gladly reschedule. So, we called him to figure out what the problem was with Wednesday. His response? We don't even have a powerpoint ready. How can you start fund raising, and submit a request to a fund raising group, and not have a powerpoint presentation ready? I mean, you're playing with live ammo here. He gave us this long, sad story about two days being two short a time to get a powerpoint together. As my coworker said to him "The next time opportunity calls be prepared". As this guy will find out, sometimes you only get one bite at the apple.

The second group was very interesting, and I hard time focusing on the business because I thought the product/market was fascinating. A group of guys are developing a new card game (think Magic: The Gathering or Magi:Nation) that is built specifically for tournament play. This space is fascinating. When the Pokemon game came out they went from nothing to $1+ Billion in less than two years. I also found it interesting that each card costs $1,000 to produce, then only $0.02 to manufacture. They need around 400 cards to launch the product. These guys get to go on, I'll post updates on them in the future.

Another group, who me and my co-worker have both known personally for a couple of years now, is coming back to our group for a second round of funding. We like the product, which is a software solution geared towards autism care, and there is a huge need for the product (parents are currently spending the NiH suggested $40+K per year in education for autistic children). Additionally, just as a person living in the world I like to see companies like this exist to help improve people's lives. However, the CEO looked truly shell shocked when he presented to us. I've never seen him so nervous. He is really uncomfortable talking about the sales/marketing strategy, even though it seems perfectly reasonable to us. I'm worried about him because passion is one of the critical intangibles that an entrepreneur must project when pitching for capital. When you seem bored, why would an investor want to invest? I'll keep you updated on this guy too.

The last group decided to cancel our meeting today (hence I'm able to write this post). They are starting a membership group that seems like it could appeal to sales executives. Basically, it allows members to get exclusive benefits (such as courtside seats at basketball games or having the chef come talk to you about your meal). We saw them a year ago with mixed success, but they've made some progress over the last year and might be a compelling investment. However, if you don't come meet with us, I can't get you in front of my investors.

So, there you have it. No truly bad companies this week, perhaps next week we'll find some.

Health Insurance

2005-08-19T12:01:00.000-07:00

Health insurance blows. If you don't have it, you're taking a huge risk that you'll develop a "pre-existing condition" and be stuck with huge medical bills (not to mention having the condition itself). If you do have it, you're paying an arm and a leg for it. As consumers, we are basically all chipping in to cover those incredibly expensive hospital stays for other people. So, who pays the least for coverage now? It's employees of large companies. Who pays the most? The self employed and employees of smaller companies.

Take my place for example. My coverage has a small per visit co-pay ($20), a pretty small deductible ($300), then covers 100% of office visits and 90% of hospital visits. All of that is very good for the low, low price of $15 month. IfI just had to cover myself, I wouldn't have a problem with this setup. However, the cost to add my wife and newborn son is half of my paycheck!

I don't really understand why we live in a system where employers cover medical expenses, anyway. It's even hard to tell what anything costs at the doctor's office because the same procedure has different rates depending on the physicians agreement with the Insurance Provider. Michael Porter had a good article about this conundrum in the Harvard Business Review, a good summary is available here. The whole thing just sucks.

Idea Tracking

2005-08-16T15:10:00.000-07:00

I get to talk to entrepreneurs in my job. Not just talk to 'em; they give me their pitch! They often think that I make the investment decision here, which means they really try to impress me. My role is actually to pass on the best opportunities to the decision makers, but it always feels good when people try to impress you.

These companies really run the full gamut. Companies have said the following to my face:
"We are going to be bigger than Microsoft"
"We are going to replace the CIA"
"I had margarita's with George Bush and Colin Powell in Mexico"
"Gatorade will buy us" - This company makes a reverse osmosis device that turns sludge water into potable water that tastes like Gatorade light. Their usage case, though, is about a group of Army Rangers in Iraq who all pee in a barrel then use this device to drink their own urine in order to survive. There is no way a multi-billion dollar brand like Gatorade is going to put their image next to a bunch of guys drinking their own piss.
"I'm a business man" - this usually means the entrepreneur is good at sales and knows nothing about his own company. (Interesting side note: no woman has ever said to me "I'm a business woman".)
"I could give the pitch, and it'd be much better, but he's the founder so I thought it made sense for him to do it" - This means the speaker is either lazy, arrogant, or doesn't know about his own company.
"Unlike most companies you get around here, I have to hit payroll every Friday" - In today's start-up market, the only companies that get funding are post-product post-revenue. This means, everybody has payroll to hit.

This last one is my new favorite:
"I made a milk substitute that tastes like whole milk!" - Yuch!

The last two companies I met with were interesting. One company created a online repository for electronic medical records. This was a good idea, but it seems the company is more focused on the technology than the business. Ultimately, no matter how feature rich a product is, people will only buy it if it has a benefit (is cheaper, increases revenue, makes me feel cool, etc). Needless to say, they couldn't articulate a single benefit of the system (though we drilled down and found out that there may be value to diabetics or asthmatics). It's usually a bad sign in a pitch when the company says "We don't know anything about marketing". Unfortunately, the one absolute in the start-up world is that all new companies need sales. Sales come from good marketing, so telling an investor you don't know anything about marketing is like giving the "reverse secret handshake", the one that tells everyone you don't belong here.

The other company has a hosted product for helping cell phone companies both decrease churn and increase revenue. If this works, this is like the holy grail for cell phone companies. We'll see if he has any success raising money.

Arkansas?

2005-04-11T14:01:00.000-07:00

I don't know what these guys are thinking. Last weekend I was in Portland, OR for a business school competition. Part of the process was getting the chance to meet students from other business schools - including the "Sam Walton School of Business" in Arkansas. Generally, I enjoyed meeting this team and truly thought they had a chance to win the competition (we all lost to the team from Thailand). Unfortunately, here is an actual conversation I overhead between an Arkansas team member and my team mate, Ivan.

Ivan: "Hello, my name is Ivan"
Arkansas: "I don't know"
Ivan: "What's your name"
Arkansas: "Bill. Where are you from?"
Ivan: "Moscow, Russia"
Arkansas: "Austin? Is this your team mate?" (pointing to the guy from U.T. Austin)
Ivan: "No, Moscow"
Arkansas: "Australia? Austria"
Ivan: "Moscow"
Arkansas: "Oh, okay"

The conversation switches to the competition, and then ...

Arkansas: "So, the weather must be much colder in Germany, huh?"
Ivan: "Probably"
Arkansas: "Do you think you'll go back to Germany?"
Ivan: "Russia"
Arkansas: "Huh?"
Ivan: "I'm from Russia."
Arkansas: "Oh, Russia"

After the awards ceremony, Bill told me "If we won, we were gonna call the hogs".

Case Closed!

Holiday fun

2004-12-20T11:24:00.000-08:00

Here is a glimpse into my life. This weekend, my wife and I were invited to a holiday party / gift exchange. We knew the hostess, but the rest of the attendees were strangers to us. All things considered, it sounded like a fun way to spend a Saturday night so we decided to go and have a good time. The directions in the invitation were to "bring a home made gift", so we immediately thought about baking something delicious. My wife made jelly cookies and I made a pumpkin pie - both very festive items and both made with milk and eggs.

When we arrived we learned that the other guests were vegan! Our cookies and pie sat there all lonely under the tree - completely shunned by everyone else- while the homemade chai, erasers, and soap were the hot items of the evening. We ended up taking our food home with us a little dejected and feeling very unwelcomed. Oh well, chalk another one up to experience.

British English

2004-12-02T14:00:00.000-08:00

My Entrepreneurship professor, who grew up in North Wales, UK, told us the following story about his first year teaching in the US....

It was the end of the first term of his first class at Texas A&M, and he needed to pass out student evaluations. He asked one of his fellow professors about what he needs to do when distributing the evaluation forms. His buddy told him "just make sure the students have #2 pencils with erasers".

So, the next day in class he hands out his student evaluation forms and says "make sure you all have a #2 pencil with a rubber on it!"

Feeling Lost

2004-12-01T14:22:00.000-08:00

Oh dred, it's December in Seattle. Good bye, sunlight ... hello dreary. I grew up in the Northwest and the weather never bothered me. After living in NY for a while, I learned the hard way that you can't go home again. It's really cold back east ... it's so cold that when you're laying in bed all warm and toasty you're afraid that if you get up you'll never be warm again. The windows look like hazy stained glass, and just standing near a doorway sucks the life right out of you. Despite all the coldness, it's usually bright and sunny. If you didn't know any better, you'd think it was beach weather outside - until you see people in fur coats running like mad for a shot of gin and tonic with a St. Bernard right on their heels.

I didn't think dreary would bother me, but it does. I say ugh every day at 3:30 when it's pitch black outside. There's a saying that you might be from Seattle if you go to work and come home in darkness, but only worked an 8 hour day. They also say that you might be from Seattle if you know more people with boats than air conditioning.

My *favorite* new show of the year is on tonight - Lost. It's not so much that I like the show itself, sometimes it's a little slow and/or unbelieveable. I like the potential of the show, and the mystery. So, these people's plane crashes on a island in the South Pacific off course with little/no hope of ever being rescued. These odd series of fantastic events keep the inhabitants hopping. They've already killed a polar bear, run from a "monster", and miraculously healed a man in a wheel chair. Each week they give the background of one of the survivors. This, is the brilliance of the show. They can take the story anyway by creatively applying a new and unique personal background. So far, they've pulled if off pretty well. I'm also intrigued by the magical components of the island - is it explainable or mysterious? Who knows.

Anyway, I'm feeling it.

Hit the post

2004-11-30T14:58:00.000-08:00

I'm either a young guy who's starting to feel old, or an old dude who doesn't know it yet. I often vacillate between feeling like I'm coming of age, and feeling like I've missed the boat.

I currently spend most of my time in the business school at the University of Washington pursuing an MBA. I see these two years as a "pause", a little stop before moving on to the next big event. When I entered business school I knew exactly what I wanted to do when I got out. Now, however, I have no idea.

I spent countless hours in New York programming for financial services companies before business school - but I didn't know a thing about money. Really. I helped build the accounting systems for some of the most famous investors and hedge funds on the street, but couldn't describe a p/e ratio if my life depended on it. I started in the dot com era, when anyone who had seen a p.c. could get a six figure salary programming. I knew that stock options were a good thing, but I didn't know why. For all I knew, stock options were something you held onto for three years then traded it in for a million bucks. Boy, we were all wrong.

I'm in Seattle now. I have some vague notion that I want to start a company involving software and stocks, but I think I could be happy not starting a company, and not working in software or stocks. I started one company already. My business partner used our check book to pay for his water bill. Who knows what else he uses the check book for. It's not exactly "synergistic". My one prayer is that he doesn't totally screw me over. Sounds like we're on the fast track, huh?

I have a cool part time job. I match up early stage entrepreneurs with angel investors. At times, my job is to be Simon for startups: I tell them whether or not they have any chance to make money in business. Most entrepreneurs don't know how to create a business. One guy told us that he had drinks with the President in Mexico and that he's going to replace the CIA! Another guy is actually building Optimus Prime, who he plans to sell to either the Army or the timber industry. One guy sells a product that turns urine into gatorade light! That'll be a hot seller this Christmas.

On Friday nights I play co-rec soccer. It's one of those sports where the fans are all on the field. We play under the lights (which is fun), but we also play in the cold (which isn't). In our last game of the playoffs (we were playing for 5th place), I had my first good shot on goal all year. The shot was perfect ... all the way until it clanged off the goal post. We lost 1-0.

All hail 6th place!