http://vimeo.com/channels/ent101

MaRS offers a complete set of videos that provides business 101 to those who want to create a startup. The videos are pretty straight forward and the speakers are experienced entrepreneurs or people in the industry who provides great insights and share experiences.

Kwedit is a strange name for a payment company. This is a startup that offers a new form of payment to social and interactive games that allows people to buy virtual goods. The strange thing is that it allows people to “promise” to pay for a virtual good and the user can pay the promise later with a bar code in a 7eleven store.

Even though this seems to be a great innovation, the idea of printing a bar code and pay it in a retail store is nothing new to date. The strong differentiator of Kwedit is the idea of promising to pay later. I wonder what would happen if everybody promises to pay but none of the actually pays anything. I believe that the CFO of the company would be scare of the increase in the account payable of the balance sheet.

This type of payment for virtual goods reminded me of Habbo Hotel. Habbo is a Finnish company that started its virtual goods operations before the internet boom. It is probably the first company to have a business model based on selling virtual goodies to users. Interesting enough, Habbo targeted in a very narrow market segment. Its targets on teenagers that love to chat in pixel-lated environment.

Habbo and its many forms of payments.

Habbo offers 7eleven payments too. OK, they sell pre-paid cards and Kwedit doesn’t.

In my humble opinion, Sulake could have grown much more if it had focused on the virtual good market as a whole market instead of just that niche teenager segment. It could have created a strategic plan of reaching all types of games and services based on virtual goods. Well, other companies grew upon this model and they are newer than Habbo. C’est tant pis.

CrowdFlower is a company that allows companies to outsource their repetitive tasks such as data verification and filtering. I think initially this can be very useful for internet companies that need to have content verification and data check services. Usually, it is not cheap to hire people to do this kind of job and the error rate is quite high for this type of repetitive task. I think the value proposition is to offer this type of service where companies do not have to hire people and have higher quality of service. It is a promising service.

The company received an additional of $5 million funding as stated from http://bits.blogs.nytimes.com/2010/01/20/crowdflower-raises-five-million-to-boost-crowdsourcing/.

I found out a quality of life index of over 100 countries. Canada is positioned at 11th together with other 8 countries.

Quality of Life Index 2009

Read more here.

This is very helpful for my New Venture Project timeline.

Quick summary:

1. Trying to raise money too late
2. Trying to raise money too early
3. Lacking a realistic assessment of the companys’ value
4. Not building enough substance before approaching investors
5. Not splitting the message into smaller chunks
6. Preparing poor pitch material
7. Pitching to the wrong investors
8. Not pitching at all
9. Getting too greedy
10. Not willing to share risk

Read the whole post at Arctic Startup via 10 Mistakes Entrepreneurs Often Make When Raising Capital.

I should be studying for my final exams, but I couldn’t resist reading posts from Startable. This time, they are sharing a neat and simple framwork to make a great business plan pitch. After reading it, it actually gives us tips to how to write and organize a business plan. I was very interested in the marketing part where it gives an idea of what VCs are looking for marketing data in the business plan.

Quick summary of the post:

1. Passion - training and training will lead to a passionate pitch.
2. Simple, Short and Concise - grab your audience attention in less than 10 minutes.
3. Pictures are worth a thousand words – avoid putting all your business plan in one slide, use images instead.
4. Convey what your business is in 90 seconds – tell your audience what you are offering to the market in 90 seconds.
5. Keep text in a slide to no more than three lines – don’t put all business plan in one slide!
6. Target market and market size – who you are selling to?
7. Marketing - how are you going to sell to those people?
8. Competition – list 3 competitors and why you are better then them and barriers to entry.
9. Product - what makes your product unique? Any IP?
10. Revenue potential – project and assume with pride, don’t be over consevative nor creative.
11. Costs - identify cost and provide scalability savings.
12. Team - why your team is the best to run the business?

Zynga is the company responsible for all those spam like games, such as FarmVille or MafiaWars. All these games are targeted to Facebook and they make money by showing advertisements. All these social type of games target the very basic human emotion of achievement. Most people play these games because they want to receive a higher status or position in their character or their skill level. In Facebook, players can show off their “new virtual and acquired ability” and get recognition from friends and other players. This is a big driver for the success of these games.

Zynga

I wonder why Facebook doesn’t merger or buy these game companies. It is part of Facebook anyway. It should acquire and get the game revenue. Currently, game companies can show ads from AdSense or any other place. Facebook loses ads revenue because of this.

The impressive thing is that the company is receiving more $180 million. I wonder what they are going to use that money for.

More at http://www.businessinsider.com/zynga-takes-180-million-venture-round-from-dst-others-cue-russian-mafia-jokes-2009-12

I read a very interesting article about HR Acquisition from “A VC” blog. It shows what a HR Acquisition is and how to calculate the acquisition of a target company in simple financial model. A must read for people who want to work in the VC world.

From A VC

via The HR Acquisition.

Times Skimmer

I was reading this news Google Faces A Different World in Italy from the New York Times and it is about Google’s criminal charges related to privacy in Italy. A senior executive in Italy may get to jail because of an outcry over an online video involving an autistic boy.

The implication if Google loses is that opens the discussion of who should be liable for information in the internet platforms, such as YouTube and even Google Search, in Europe. In the US, most of this discussions were solved by the Digital_Millennium_Copyright_Act that creates a safe harbor for online service providers. Basically, people can only sue internet companies if it’s proven that the company hasn’t  done anything to stop the offence (copyright or other legal offences). I’m impressed that Europe does not have such laws protecting online service providers yet.

It reminds me of a similar situation when the Google Brasil’s managing director was being held accountable for pedophile pictures on Orkut. Google Brasil and US created huge task-force to curb the infestation of that problem with people and new tools for the federal police. The initiative went really well and the government abandoned the charges. However, there is still no laws defining clearly what the responsibilities are for online service providers regarding about illegal or offensive material in their websites in Brazil.

I’m worried if governments start demanding companies to act as a censor for information flow. The cornerstone of Internet as we know is sharing information. When companies and government start blocking access to information, the internet will not be the same. Consequently, the way we use and do business on the Internet may also change.

I am very impressed and glad by the speed that Stribe has replied to my post. A good entrepreneur should be able to react to the current dynamics of how people comment and make opinions about his product. A fast reply like that is a plus. He got me from this positive attitude.

I registered for the beta and I will check it out and compare with other similar tools from the web. I will update my findings in another blog post once I tested them all.

Below is the reply from Kamel, the CEO of Stribe.

———————————————————–

Hello Chim Kan,

Thanks for sharing. it’s very interesting to have your point of view. I am going to try to show you the key differences between Stribe, Facebook Connect and Google Friend Connect :
- Stribe is an embeddable White Social Network. That means the social network can be fully branded with look & feel of the website;
- Stribe is a B to B service. The ownership of data and content generated by the users of the community is the ownership of the “Stribed” website.
- Stribe provides the analytic of the social activity of the community to let the website drives and understand their members online;
-There is no downloading neither technical requirement to stribe a website. Indeed, you just a Javascript code let you embed a Stribe Social Network. All Internet users will be able to see/join/share with your community IN your website without downloading anything.

Finally, the speed of the website is not impacted by the Stribe Social Network because it is loaded only if the end-user want to interact or engage with the community.

What do you think about these explanations? it is helpful to better undersdand our value proposition?
Feel free to contact me to move forward.

Thanks again for sharing.

All the Best,

Kamel
@stribe

——————————————————————————–

I read so many venture capital and entrepreneurship books. All of them say to cap the legal fees that a start up should pay to the vc firm in the funding time. Startable has a neat and short post about the importance of doing and paying attention to it. Read more Term sheets and legal fees.

I’m currently taking the MBA course at Ivey business school here in Canada. I started on August and it is impressive how many things we learned until now. I am very sure that I do not see business, organizations, finance, accounting and career management in the same way as I used to. Even though I’m just here for about 4 months in the course and in Canada, my knowledge about business has improved significantly. For instance, I can provide assessment in the optimal capital structure of a firm, I can read and understand balance sheet in the point of view of managers, investors and shareholders, also I am starting to see how strategy can drive employees and managers behavior and how a leader can drive the direction of a company.

The course lasts for 1 year and its main focus is in general management.

Besides the academic life of an MBA, I’m participating in many different activities. Maybe too much.

I’m one of the four Executive Directors of LEADER Project, a student run not for profit organization aimed to teach entrepreneurship in universities in Eastern Europe countries (Russia, Macedonia, Moldova and Ukraine). I founded with Ali the Innovators club. I’m member of the Finance, Entrepreneurship, Marketing, Wine and Presentation Skills clubs in the MBA side and I’m member of the French, Portuguese and Visual Arts clubs in the University of Western Ontario side.

Also, I’m creating a business plan with John, John, Matt and Pema. We think we may have a great opportunity in the online advertising industry (I always worked in Internet monetization, my expertise). Besides, I’m participating in the Canada’s next top ad executive competition with John. I will also participate in some others competition in the beginning of next year.

After all of this, I’m also making some new friends! Friends from China, India, Venture Capital industry, Automobile industry, Canada, Peru, etc.

A lot of things are happening, that’s why I am not updating my blog as much as I used to. The great thing is I’m able to manage and prioritize all my activities. Thanks for my Google experience where I learned how to do things fast.

My next posts will be focus on the monthly Canada’s Venture Capital Firm list (I’m posting on December 3rd). I will add more information for each of the firms. Also, I will resume my posts about the case studies from the Entrepreneurial Finance from the MIT OpenCourseWare. I promised in the beginning of this year that I would go through all the cases from that course at MIT and I think I am much more prepared to discuss the cases in that course.

Here are some of my previous posts about the Entrepreneurial Finance course:

Horizon Communication

Venture Capital Valuation Method

What happens when the schedule slips in startup?

Technical Data Corporation

I will resume from the Horizon Communication case. Probably, I will make a podcast for about it.

Stay tuned!

Internet Speed and Costs Around the World

I wonder what people in each of the high Internet speed market do.

This is a very interesting and basic book about Venture Capital industry. It does inform you some tips about what kind of skills and career path that you should take before joining in. Also, it provides and introductory level of terms and vocabulary for you to get used to before trying to get in a VC firm.

I do not recommend just to read this book alone as a way to have a strong idea of the industry. You should read a lot of other materials spread all over the Internet so you can really have a better idea if you really do want to invest your time and money into the career of a VC.

MIT Open Course Ware

Managing Innovation and Entrepreneurship

Managing Innovation: Emerging Trends

Managing Innovation: Emerging Trends

Early Stage Capital

Early Stage Capital

Designing and Leading the Entrepreneurial Organization

Designing and Leading the Entrepreneurial Organization

Law for the Entrepreneur and Manager

Law for the Entrepreneur and Manager

Entrepreneurial Marketing

Entrepreneurial Marketing

Entrepreneurial Finance

Entrepreneurial Finance

Listening to the Customer

Listening to the Customer

Pricing

Pricing

The Nuts and Bolts of Business Plans

The Nuts and Bolts of Business Plans

Technology Strategy

Technology Strategy

G-Lab: Global Entrepreneurship Lab

G-Lab: Global Entrepreneurship Lab

Compared to others

The Elevator Pitch Contest

The Elevator Pitch Contest – MIT 100K

Venture Investment Increases for Some Start-Ups

Venture Investment Increases for Some Start-Ups

Incredibly enough, this is a very similar book to Vault Career in Venture Capital book. They talk about the same introductory ideas for those who wants to pursue a career in the Venture Capital industry. It does provide a short story of the industry. Some basic concept about the industry, firms, Job, workplace, getting hired and other references. Again, this is not enough if you do really want to invest in this industry. You have to research and read more about the venture capitalist, you have to learn about Business plan, entrepreneurship, etc. It is not as easy as you think to get in the industry.

The Back of the Napkin: Solving Problems and Selling Ideas with Pictures

I read this book and it is really great to show a new way of structure problem solving framework.

It provides a a good introduction about the benefits of the visual thinking. Then, it provides a step-by-step walkthrough about how to detect, solve and show problems through the use of our visual faculties.

It first shows us how we can enhance our ability to see critically by looking, seeing, imagining and showing. Then, it provides the SQVID method of analytical thinking. It helps our right-side of the brain to be better connected to the left-side. So, we can draw and think at the same time. Moreover, it provides the [6][6] framework that helps us to problem solving.

The book is very easy to read, but it does not lack anything from its simplicity. It provides a complete framework solution for business issues and it’s a great book for those who wants to see creative ways of problem solving.

I would also recommend this book for those who loves TUFTE. Tufte’s books give guidelines of what is good or not in the information design knowledge. The Back of the Napkin provides the how to create amazing graphics and pictures of our problems.

TiE Young Entrepreneurs

I love this competition. It is one of the firsts business competition towards students from 9-12. This business plan is hosted by Carolinas – The Global Network of Entrepreneurs and the award for the winning team is USD 10K.

It is important to foster this type of competitions to children and teens. They will be able to learn and train their guts about the process of creating a new business.

For more information check it here.

I’ve just read news from Revista Exame, a prestigious Brazilian weekly magazine, which talks about the new generation of entrepreneurs in Brazil. According to it, there are 10 million of Brazilian entrepreneurs and the new generation of entrepreneurs are creating companies because they believe they have the skills and will to do it. Compared to the older generation, a lot of self-described entrepreneurs had to open a company because they were not able to get into the job market.

10 million of entrepreneurs in Brazil

Then I went to the Global Entrepreneurship Monitor website and I downloaded the GEM 2008 report. It is a comprehensive survey about entrepreneurs in 43 countries. It separates these countries in 3 categories: Factor-Driven Economies (economies that depend on natural resources mainly), Efficiency-Driven Economies (economies that rely on the economy of scale or comparative advantage in production) and Innovation-Driven Economies (economies that rely on the invention of new technology).

There are some interesting data.

For instance, it seems that the less developed the country, the stronger entrepreneurial activity in that country.

Early-Stage Entrepreneurial Activity Rates and Per Capita GDP, 2008

Early-Stage Entrepreneurial Activity Rates by Gender, 2008

However, the entrepreneurial activity in Technology sector is stronger in more developed countries such as Canada. Although the GEM report doesn’t explain why this happens, it is intuitive to know that the development of high technology needs a strong education system in the country. That is why that you can see that countries such as Australia, Ireland, Denmark and Canada have the strongest entrepreneurial index in the Technology sector.

Percentage of Early-Stage Entrepreneurial Activity Active in Technology Sector, 2002-2008

The Ex Post Facto blog commented about a report from the Center for Economic and Policy Research August 2009 about the percentage of total computer-related employment in companies with fewer than 100 employees. It is interesting to see United States in the bottom of the graph. You can find that Italy, New Zealand and Austria have more small companies in the computer-related services than the US.

Ex Post Facto - Entrepreneurs in the US

Definitely, this doesn’t mean that United States lag behind in the entrepreneurial activity. It is totally the opposite. United States have the Silicon Valley.

All these data do not account other many particularities for the US entrepreneurs. Even though the US main not be in the top position for any entrepreneurial index, it does have a strong entrepreneurial culture and environment.

In my experience, there are some strong cultural traits that you can only see in the Silicon Valley:

-          Belief that one can get rich by starting up a new Google or Apple.

-          Low opportunity cost for entrepreneurs.

-          An unusually high concentration of venture capitalists per square foot in the region.

-          A lot of stories of very successful entrepreneurs.

-          Great universities and culture for innovation.

-          Local culture that see failure as a good thing instead of a bad thing.

-          Also, a lot of young people want to follow the entrepreneurship path, instead of going for the traditional and stable way of life/ career (medicine, lawyer, corporate life, etc.)

In comparison to Brazil, most university students and young people don’t have the same type of culture or thinking. Maybe, there is a huge difference of opportunity cost in becoming entrepreneurs.

-          Most university student aim to get to work in a big multinational or for the government.

-          Most jobs don’t pay enough for young people to sustain themselves, so most young people live with their parents until late stage of their lives.

-          Families pressure their sons to follow a more stable career path.

-          There are not a lot of successful entrepreneurs stories to tell, or those who are successful have some kind of special background that most Brazilian don’t have (rich family support, family have money to send children abroad, etc.)

-          Universities in Brazil are followers or they don’t have great innovation in high growth industry such as internet.

-          Venture capital industry in Brazil is still in its infancy (Private Equity is much stronger in Brazil, GP Investimentos is the top firm in Brazil)

As you can see, these “soft” attributes cannot be accounted in any of the researches you have on the market. I believe they can make a significant difference in determine if a country or region will have its own Silicon Valley.

I am having fun and great time with my MBA classmates here at London. Today, we are having an amazing race, so we can know each other and the city better.

My team is the number one team. Mike, Peter, Kyle, Elika and I are running throughout the city to catch clues, do some tasks, take some pictures, shoot some videos and have great fun.

Until now, our team is doing great. I can’t tell you how well we are now because of competitive issues but I believe we will definitely be the first.

Here are some of the pictures. Enjoy!

Invest Now! - from Flickr

My last post from the Entrepreneurial Finance course is here.

Today, I want to share my summary of the Horizon Communications Corporation (A) case study.

This document basically shows the industry background of telecommunication in the 90′s. Basically, it highlights the Telecommunications Act of 1996 and how it changed the market.

With the Act, there was a new market opportunity for companies to provide transmission facility to customers. Basically, there was an opportunity for new companies to serve as a hub connecting a telecommunication facility for big clients to other local telecom providers and to long distance providers.

Along the case, it explains the who the founders are, what the Horizon’s operating strategy is and what the product and service are.

The case presents a serious of challenging questions to the Horizon’s management. It wants to students to think what amount of financing should they ask for and which venture capital firms they should approach.

Again, this case presents challenging questions for VCs and entrepreneurs.

Assignment from MIT OpenCourseWare:

Horizon Communications

1.Would you have started this company? Would you invest in this company? Why or why not? What do you think of the economics of the idea? Of the management team? How does this investment differ from that in Technical Data Corp.

2.What pre-money value would you place on the company? I.e., what value should the Horizon team place on the company when they try to raise money? How much money should they attempt to raise?

3.How should Horizon approach their fundraising process? Should Horizon go to a venture capital firm or to family and friends? If Horizon decides to go to a venture capital firm, which firm or firms should they target?

4.Can a venture capitalist add value to the Horizon team? How?

Assume:

. Horizon’s marginal tax rate is 36%
. Expected inflation is 3%.

Read the Case Study: Horizon Communications Corporation (A)

Please, add your answers in the comment section below!

Invest - from Flickr

I’ve started studying the Entrepreneurial Finance at MIT OpenCourseWare by myself a month ago. I wrote my first post about the first case study here (Technical Data Corporation Business Plan).

Until now, I think the selection of the case studies are awesome. It presents many cases where the student is put in the position of a venture capitalist and an entrepreneur. For instance, you have to learn how to valuate a business and decide if you want to invest in a specific company. Plus, you must provide your analysis to decide what you want to do next.

Today, I’m want to present my summary and my recommendations about the Centex Telemanagement, Inc. case study.

Centex Telemanagement, Inc.

- The case starts with the story of Sierra Ventures and its found Peter Wendell. Then, it talks about how Wendell met with Jeffrey Drazan. Drazan was a VC associate hired by Wendell. In this part of the case, it gave me a very interesting vision of how VC hires an associate to work with. Wendell wanted to invest in the telecommunication industry after the break-up of AT&T’s monopoly and he wanted to find a person with experience in telecommunication industry. Luckly, Drazan, who was in that industry, wanted to go to the VC industry. They had the chance to meet each other and the relationship developed.

- Later, it shows quickly the Centex Telemanagement formation, but the focus is how Drazan found and brought this opportunity to Wendell. Drazan worked with the Centex Telemanagement by acting as the CFO of the company. However, Centex and Sierra hadn’t formed any formal and legal relationship yet. Drazan was supporting the financial projections and planning the growth of the company. Everyone was expecting the Sierra would make an investment to Centex. When they were almost closing the details of the investment, the Sierra founders decided not to continue to the plan. Drazan was shocked because he dedicated an amount of effort to the company and it would ruined all his efforts. However, after some negotiation, they closed the deal in a staged/milestone-oriented approach to the deal.

- To get higher valuation, Centex would need to achieve some milestone, such as hiring the CEO and some other people in the senior management and also Centex would need to achieve an X amount of revenue by a deadline.

Assignment from MIT OpenCourseWare:

Centex Questions:

1. Sierra Ventures and Centex:

-Describe the deal structure:
-What role does Series C Preferred play?
-What value does right of first offer have?
-What valuation is Sierra offering to Centex? How can Sierra justify this valuation?

2. Private (initial) investors:

-How much dilution do the initial investors experience?
-How much dilution would the initial investors have experienced, if they had anti-dilution protection on their initial investment of $499,999? (Full ratchet? Weighted ratchet?)

Assume that by May 1985 the private placement offering has raised the full $499,999 for Centex at $2.25 per share

Read the Case Study: Centex Telemanagement, Inc. – 286059p2

Please, add your answers in the comment section!

A new study by the Ewing Marion Kauffman Foundation, Right-Sizing the U.S. Venture Capital Industry, states that venture capital industry’s return is under performing because of the current size of the industry. It says that by reducing the it, this industry may increase its return.

The logic is that the VC firms won’t have that much money to make high valuations in startups, so the return will be higher naturally.

Kauffman says The US VC industry must shrink

This report is in tune with what I am reading from The Money of Invention, How Venture Capital Creates New Wealth: Paul A. Gompers, Josh Lerner. Josh Lerner’s book states clearly that if the supply of money from limited partner is high, while the demand of investment from startups is the same, the consequence is lower return.

This is incredible.

You can read more about the Kauffman’s paper here: http://www.kauffman.org/newsroom/venture-capital-industry-must-shrink-to-be-an-economic-force-kauffman-foundation-study-finds.aspx

The Technical Data Corporation Business Plan is the first case study from the Entrepreneurial Finance course from MIT OpenCourseWare. It is a business plan prepared by Jeffrey P. Parker in late 1980.

The case describes that Technical Data wants to raise $100,000 before the end of 1980 in the form of 20 Units. Each Unit would have 50 shares of common stock offered at $10 per share and a promissory note (debt) of $4500.

Technical Data Corporation: Business Plan

You can read the case study here: http://utopia.duth.gr/~gk7844/moustakis/M1-2007-08/business_plan_example_1.pdf

Then, in this lecture, there are some questions regarding about this case from the open course. I answered them in bold.

Technical Data Corporation: Business Plan The case contains excerpts from a business plan prepared in late 1980.

The entrepreneur, Jeff Parker, proposes to start a company that will supply information to professional investors in the bond market. Among the issues you might address are the following:

1. Should Parker enter the business?

Parker is asking for $100,000 to start up the company. He will create a business based on an existing market of Telerate customer. If he secures, as he stated, the deal of promotion to Telerate’s customer, he is able to attract customer to his financial product and earn a stable source of revenue through the monthly subscription of the service. So, he should enter the business.

2. Would you invest in this deal?

He structure his deal in a promissory note and a few shares of his company. This type of structure is not ideal for a venture capitalist nor private equity partner. First, there is no incentive of high payoff in the $4500 from promissory note even if the interest rate is 15%. Second, the percentage of ownership is small, thus the active investors do not have a great say in the company. Lastly, the company’s grow depends on the Telerate customer base, so there is not a huge or exponential growth rate for the business in the future.

3. How has the deal been structured? Why? (Note that Parker is selling equity for 10% of the company in the units. The two directors with 1.5% each are buying 3 units each.)

The deal is structured in this way:

- 20 Unit
- Each unit having $ 5000 in value
- $ 5000 X 20 = $ 100,000

Each Unit:
- 50 shares of common stock at $ 10 / share
- promissory note of $4500

This is a great exercice. The next case I’m studying is the Horizon Communications Corporation (A), this one is much harder.

15.431 Entrepreneurial Finance

There is an amazing course for people seeking to work in the private equity, venture capital industry and entrepreneurship. The Entrepreneurial Finance is an open course that focus on the finance of start-up ventures.

It addresses some of the important questions such as:

- how much money can and should be raised
- when should it be raised and from whom
- what is a reasonable valuation of the company
- how funding should be structured.

I am self-studying this course and it is great to read case studies that make me aware of the issues that I will be facing in the VC/PE industry.

You can read more about this open course here: http://ocw.mit.edu/OcwWeb/Sloan-School-of-Management/15-431Entrepreneurial-FinanceSpring2002/CourseHome/index.htm

In any negotiation, it is important to establish these four points:

- Maximum point

- Fair price

- Minimum point

- Walkaway point

For example, when someone is negotiating salary, it is important to established these four point.

Let me illustrate this:

A venture capital associate at Vulcan may have salary varying from:

Vulcan Analyst Salary

http://www.glassdoor.com/Salaries/Vulcan-Analyst-Salaries-E3037_D_KO7,14.htm

So, the candidate for salary negotiation might have these:

- Maximum point:  $ 125k
- Fair price: $ 98k
- Minimum point $ 70k
- Walkaway point $ 65k (just for illustration, it could be the minimum wage if the person is desperate)

In this example, I’m not considering the experience level. Obviously, the more experience you have, the more leverage you have to ask for higher salary.

Once with these number, it is easier to justify why the person should get a higher salary. Also, you will have a better picture of what you should ask for yourself.

Best alternative to a negotiated agreement or BATNA is a term that describes the alternative options that someone has in negotiation. When the parties do not reach agreement in the original proposals, each party will try to reach a “second best” mode.

For any negotiatior, BATNA is one of the essential step for preparing a negotiation. Also, it is important to know what BATNA is for the other party. This information can be used to smooth out the differences in any negotiation.

Following BATNA, it is also important to answer these two questions:

- Why am I negotiating?

- Why are they negotiating?

Negotiation - Time, Information and Power

There are three main variables in negotiation: time, information and power.

Time is important because the lack of it can cause great damage for the person or organization.

Imagine that two venture capital firms have a great interest in a startup company. They know that one of them will close a deal tomorrow. So, the most important factor in the negotiation is time. Who is going to have more time to think and negotiate?

Information is important when it can greatly affect the value or the conditions of the deal.

Let’s think that a biotechnology startup has a phase IV (read more about clinical trial) drug waiting for approval. A private equity firm is very interested in the company. It knows that if the company succeeds in the trial, the valuation of the company will be astronomical and it will not be able to get a good deal with the company. However, if the drug does not pass the trial, the startup will not have great value at all.

In this case, information is extremely important for the negotiation.

Lastly, power is also extremely important. Usually, one side has more resources and it will use this in the bargaining process.

A very typical example of today, MBA students graduate and can’t find jobs. Those who get offer do not have power to negotiate better salary and bonus because the company has the money and has the power to hire someone or not.

Risk is a tool in negotiation that can help you to take advantange from the other side of the table. It depends on two factors:

- Circumstances

- Risk attitude from the negotiator

Risk can be used to ask for bold concession from your partner. However, if the negotiator is risk-aversed, the chance is that the other side will take advantage and try to ask for more concession by aggressive moves.

What is negotiation?

Last weekend, I had an introductory training about Negotiation at Dale Carnegie. It was a very interesting experience to know other people, different negotiation techniques and negotiation styles.

Starting today, I will post a lot of little posts about what I’ve learned during the two day course. 

Today, I’m going for the definition of negotiation.

Negotiation is an art where two sides discuss and agree on terms leading to achievement of their goals.

Human beings negotiate every single time. For instance, salary, prices, services, what restaurant to go, etc.

Personally, I see that if I get myself prepared to the negotiation, the odds to have more success is much higher for me. I will be able to defend my interests better and I even know when I have to stop negotiating when something is not favorable to me.

There is an awesome place to read negotiation deeply: http://en.wikipedia.org/wiki/Negotiation

Differently from Wikipedia, I will show the techniques and advices that are different from what is being told from Wiki.

DreamingWith BRICs: The Path to 2050

BRIC is an acronym which means the fast growing developing economies of Brazil, Russia, India and China.

The BRIC concept was developed by Goldman Sachs’ Dreaming with BRICs: The Path to 2050 article.

The article states that if these countries follow some of the recommended conditions for growth such as macro stability, institutions, openness and education, the BRIC countries will be better prepared to achieve economic hegemony in 2050.

The article says that in 2050, Brazil, Russia, India and China will become a larger force in the world economy. Goldman Sachs used the latest demographic projections, model of capital accumulation and productivity growth to map GDP growth for each of these countries. Some of the highlights:

- The BRICs economies together could be larger than the G6 in US dollar terms
- About two-thirds of the increase in US dollar GDP from the BRICs should come from higher real growth
-The key assumption underlying our projections is that the BRICs maintain policies and develop institutions that are supportive of growth
- Higher growth may lead to higher returns and increased demand for capital
- Rising incomes may also see these economies move through the ‘sweet spot’ of growth for different kinds of products, as local spending patterns change

Read more at: http://www2.goldmansachs.com/ideas/brics/book/99-dreaming.pdf

I need to finish these books before starting my MBA in Canada in September!

The Money of Invention: How Venture Capital Creates New Wealth

Raising Venture Capital for the Serious Entrepreneur

Venture Capital Due Diligence: A Guide to Making Smart Investment Choices and Increasing Your Portfolio Returns

Entrepreneur's Guide to Preparing a Winning Business Plan and Raising Venture Capital

Startups and Venture Capitalists Beware

I found an interesting post from Matt Eventoff (http://www.matteventoff.com) about how entrepreneurs should be careful of how to communicate to venture capitalists. 

He tell us that entrepreneurs should get a central message and practice the presentation. 

Basically, a lot of entrepreneurs do not get to the point of presentation. Usually, people present the potential of their products or how cool they are but they miss the main mission or objective of the presentation. In the case of an entrepreneur, he should pass the message getting funding, for example.

I personally agree the practice part. I usually practice 2 to 4 times my presentations about saying out loud to an imaginary crowd. I practice my voice, non-verbal clues and eye contact. The results are pretty good by the feedback I receive from Googlers.

Read Matt’s post about his communication tips here: http://www.matteventoff.com/venture-capital.html

In a academic view, we could define venture capital as those firms that invest in early stage startups and private equity are firms that invest in later stage companies or public companies. However, both have the same investment style. They invest in companies in exchange for equity of a company. Also, venture capital is a subset of private equity investment. Private equity investments include leverage buyouts, distressed investments and mezzanine capital. With the economic crisis, venture capital firms  are more conservative, so a lot of venture capitalists are investing more in later stage companies which the risks are lower.

This is a rough view of the venture capital investment stages. These stages are for guidance only. In the real world, there is no standard in the classification of the investment stage. Sometimes, you can read number of rounds of investment. Other times, people will use the classification as stated below.

Angels investors

Angels investors are wealthy individuals who can invest in ranges from $50,000 to $1 million or more. They also provide expertise, experience and networking. They may perform the same roles as a venture capitalist.

News related to Angels investments

Getting Your Due
Angel investors commit less, but stay active in 2008
Houston tech startup wants to be all about you
Hoosier startups a bright spot in venture capital market

Seed stage

It is also a concept stage financing. The VC invests to allow the entrepreneur to spend on marketing research, patent application, incorporation, formation of the senior team and the company. Most VCs do not invest startups at this stage.

Funding value range around: US$ 100K to US$ 4 million (internet companies receive the least amount and the medical/green tech/energy companies receive the most)

News related to Seed investments

Burnaby startup finds inspiration in the sun
Automation Alley Invests $350K In Two Firms

Startup or Early Stage

In this stage, the entrepreneur already incorporated the business, but it has not yet started the commercial operation. Usually, it has the prototype or the final product developed.

Funding value range around: US$ 500K to US$ 5 million

News related to Startup investments 

Providence DNA research company receives $4 millioin
Tech new engine of Central Canada
Monica Healthcare, neonatal care startup, gets $1.6M
Investing dropoff hurting biotechs
Capital Factory Invests in Five Startups for 2009 Fund; Early Stage Technology Incubator in Austin, Texas AlsoRecognizes 5 Additional Finalist Startups
Prize CapitalTM Announces Due Diligence Phase for $10 Million Algae Fuel Prize 

First Stage or Round/Series 1/A or Formative Stage

Most startups in this stage already commercialize their products and have less than 3 years of existence. There is already a management team. Some companies have reached the breakeven point.

Funding value range around: over US$ 1 million (depending on the industry, the value can change drastically, the focus is on the company’s organization and the commercial stage)

News related to Series A investments 

Weekly Investor Round Up
Burnaby startup finds inspiration in the sun
AXIGEN Announces 2 Million EUR Investment
WebEx Founder Backs Chint Solar, Contributes to $50M Round
Energy Storage Rumors: Deeya Raises a Round; Bloom Piles Up Customers
Photovoltaic cell co B-Solar raises $3 million

Second stage or Round/Series 2/B

The startups at this stage already have a clear business model and they are already making some money. It has the management team and some employees. Usually, companies at this stage need capital to advance quickly the marketing and commercial efforts.

Funding value range around: over US$ 5 million (depending on the industry, the value can change drastically, the focus is on the company’s organization and the commercial stage)

News related to Series  B investments 

Auditsolutions is now Lavante, closes $5M in series B financing
May 2009 BUSINESS BRIEFS 
Microsoft: Restart or Logoff?
Turning Out The Lights: Ugobe, Maker Of Robotic Dinosaur
10-K/A: VANDA PHARMACEUTICALS INC

Third stage or Round/Series 3/C

If the company reaches this stage, it has a strong sales and customer base. Sometimes, it also has mid-level managers. The fund is used to increase more marketing, working capital, product development and expansion.

News related to Series  C investments 

Australia snares Silicon Valley wireless start-up

Mezzanine or Bridge or Expansion or Later stage

At this point, the company is going to IPO. The money is used to clean the balance sheet, remove debt and buy out any problematic investors or founders.

Initial Public Offering (IPO)

This is the checkpoint that all venture capitalists want to reach. The company’s shares are totally liquid. It means that they can sell the equity / shares they bought from the founders in the early stages of the company.

This is a very good and concise presentation about venture capital, the three phrases of venture capital investing, SBICSs and SSBICs (types of small business programs), state government initiatives, key challenges and best practices.

VC Management Challenges and Best Practices

Download the presentation here: http://ocw.mit.edu/NR/rdonlyres/E8256F94-7B44-4E02-8511-7366DE6B20CA/0/class16_vc.pdf

In many text books and even some Harvard cases, you can see that venture capitalists ask for a lower discount rate for later stage startups.

This can be represented here:

Main Reasons For a High Discount Rate From VC (made by chimkan.com)

The reason why the discount rate decreases over time is the increasing information about the company’s performance. Not only, the mature startups have some historical data to support their future performance, the startups already have customers and some kind of revenue.

A little bit more of explanation

The Base Rate is not something that venture capitalist nor do entrepreneurs have control. It is mainly influenced by the FED’s basic interest rate. If FED lower its interest rate, all other investments will be more attractive because their return will be automatically higher.

Liquidity increases over time. When the company is getting more and more famous, more people will be willing to buy stocks from the company. This increase in interest will eventually reach the IPO stage when the venture capitalist will reap the investment’s reward.

Value added from the venture capitalist decreases over time because the company will have already established a senior management capable of taking care of itself. The venture capitalist will shift to a more strategic and big-picture command of the company in the boards of directors.

Cash Flow Adjustment decreases over time because venture capital firms make money by selling their share of the company in an IPO or an acquisition. When that event approaches, there are more information about the company and the market, so the discount rate for this issue decreases too.

These are the main reasons why the discount rate given by a VC decreases over time. If I were an entrepreneur, I would use this information in my deal negotiation with a VC firm.

Origins of the Colors

This is the post for all the current material about Venture Capital Method!

Venture Capital Method: Valuation Considering Schedule Slip in the Startup

Venture Capital Method: Valuation Considering Multiple Rounds of Investments

Venture Capital Method: Valuation Considering Granting Stock Options to Management Team

Intro to Finance & Valuation PPT

The Early Stage Valuations by Venture Capital Method

Solution: Leonardo needs return of 30% instead of 50%

To start this post, I recommend you to read my last post:

http://www.chimkan.com/2009/05/05/venture-capital-method-valuation-considering-granting-stock-options-to-management-team/

Now, imagine that at the start of year 3, John project that his startup will not meet the financial targets, but not until the end of 8 year. What share should Ada seek today? And what the equity stake will round 2 investors seek?

So, it means that the financial schedule will slip for 3 years.

Observation 1: Ada will be able to change her investment because she already has done it. (She invested $ 10M for 45.3% of the company).

Observation 2: Now that Ada’s investment lasts 8 years instead of 5 years, what is her Internal Rate of Return*?
*IRR: http://en.wikipedia.org/wiki/Internal_rate_of_return
We can say that IRR is the opposite calculation of the Rate of Return.

First, you have to lay out the investment in years:

Year 1: -$5M (how much she needed to pay)
Year 2: 0 (No money given to her from the company)
Year 3: 0 (No money given to her from the company)
Year 4: 0 (No money given to her from the company)
Year 5: 0 (No money given to her from the company)
Year 6: 0 (No money given to her from the company)
Year 7: 0 (No money given to her from the company)
Year 8: +$53.56M (She should receives 42.18% of the total value of the company $127M)

You can use this formula in Excel >>> =IRR([ARRAY OF THE CASH FLOW])

Ada’s IRR is 23% instead of 50%.

The new investors will want:

$ 4Mx(1.3)^5=$14.85M

It means they will want:

$14.85M/$127M =  11.69% of the equity. The $127M is the value of the company in 7 years discounted the management shares, look the previous posts for more information.

To calculate the number of shares:

Let’s pick up the total shares from John’s and Ada’s:

1,823,636

Let’s calculate how many shares they have to issue to the new investors:

X/(1,823,636+X) = 11.69%

X = 0.1169X + 159750

X = 241,403 new shares

The price is given as this:

P/S = $ 4M/241,403 new shares = $16.56/share

The new investors should pay $16.56/share for 241,403 new shares of the company.

Hard Math from Flickr

In my last post – Venture Capital Method: Valuation Considering Granting Stock Options to Management Team: http://www.chimkan.com/2009/05/05/venture-capital-method-valuation-considering-granting-stock-options-to-management-team/

I showed how to calculate the needed number of share if we give at least 15% of stock options to the management at the end of 5 years.

Remember the imaginary story from John and Ada from the last post?

John Doe is an entrepreneur who wants to raise $ 10 million so he can launch his clean energy product for the energy industry. He conservatively analyzed that the net income will be 10 million in five years. Also, the price earnings ratio is 15X in comparable companies.

Ada Li, Dream Capital, loved Doe’s plan, but she recommended that the management team should be rewarded at least 15% share of the company at the end of 5 years. Also, she needs a rate of return of 40%.

Now, Ada and John think that they will need another round of financing at the beginning of the third year. John probably will need another $ 4M.  Ada still wants to keep her rate of return at 50%, but she believes from her experience that the second round of investors will requires only a 30% of rate of return because of the progress made in the company. Keep in mind that Ada still wants to reserve 15% share of the company to the management.

• Ada wonders what the share she needs today is.
• On the other hand, what will the second round investor look for?

To answer these questions, let’s do some step-by-step work:

Steps 1 – 8 were taken from the last post:

Step 1 – John’s company has currently 1,000,000 shares.

Step 2 – John needs $ 10 M

Step 3 – Value of the company in 5 years: $ 10 M X 15 = $ 150 M

Step 4 – Ada wants a rate of return of 40% = $ 10M(1.5)^5 = $ 53.78M

Step 5 – Ada wants that the management has 15% of the company in 5 years: 15%

Step 6 – Given that at the end of five years, the management will have 15% of the shares, so this left $ 22.5 M for the management and the remaining value to John and Ada, which is $ 127M.

Step 7 – Ada hopes to receive $ 53.78M regardless of the 15% given to the management.

Step 8 – So, she decides that she needs to own: 42.18% of the company. [Calculation: $53.78M/$ 127M = 42.18%]

Step 9 – What is the amount of ownership the round 2 investors needs? (They need a rate of return of 30% for 3 years and investing $ 4M) >>> $ 4M*(1.3)^3 = $ 8.78M

Step 10 – Remember, that we need to give 15% of the company to the management, so the required share for round 2 investors are based on this: $ 8.78M/$127M = 6.9%

Step 11 – What is the percentage Ada needs to keep her investment fine knowing that her equity will be diluted by the next round of investors and the management?

42.18%/(1-6.9%) = 45.3%

Instead of 42.18%, Ada will need 45.3% percent of the company now.

Step 12 – John will need to issue …

X(1,000,000 + X) = 45.3%

0.55X = 453,000

X = 823,636 shares

Price per share >>> $ 10 M/823,636 shares = $12.14/share 

Step 13 - Let’s add John’s and Ada’s number of shares = 1,000,000 + 823,636 = 1,823,636 shares

Step 14 - Round 2 investors will need:

X/(1,823,636+X) = 6.9%

0.931X = 125,830

X = 135155 shares

Step 15 – The new investors will need to pay…

$4M/135155 shares = $ 29.6/share

The answer:

Ada wonders what the share she needs today is.

A: Ada will need 823,636 shares at $12.14/share

On the other hand, what will the second round investor look for?

A: Round 2 investors will need 135,155 shares at $29.6/share

The next post will show further dilution of John’s equity if the something goes wrong with the company.

The Math Munching Monster from Flickr

In the very beginning of my blog, I wrote two articles that explain the Venture Capital Method:

1 – http://www.chimkan.com/2009/04/05/the-early-stage-valuations-by-venture-capital-method/

2 – http://www.chimkan.com/2009/04/06/solution-leonardo-needs-return-of-30-instead-of-50/

I also found a presentation the same subject here:

3 – http://www.chimkan.com/2009/04/07/intro-to-finance-valuation-ppt/

Today, I’m going to show how we can calculate different rounds of investments with a venture capitalist.

Imagine this following story:

John Doe is an entrepreneur who wants to raise $ 10 million so he can launch his clean energy product for the energy industry. He conservatively analyzed that the net income will be 10 million in five years. Also, the price earnings ratio is 15X in comparable companies.

Ada Li, Dream Capital, loved Doe’s plan, but she recommended that the management team should be rewarded at least 15% share of the company at the end of 5 years. Also, she needs a rate of return of 40%.

How many shares would Ada require for this investment?

What will the percentage of ownership John be at the end of five years, including the dilution to the management?

 

Let’s digest the problem:

Step 1 – John’s company has currently 1,000,000 shares.

Step 2 – John needs $ 10 M

Step 3 – Value of the company in 5 years: $ 10 M X 15 = $ 150 M

Step 4 – Ada wants a rate of return of 40% = $ 10M(1.5)^5 = $ 53.78M

Step 5 – Ada wants that the management has 15% of the company in 5 years: 15%

Step 6 – Given that at the end of five years, the management will have 15% of the shares, so this left $ 22.5 M for the management and the remaining value to John and Ada, which is $ 127M.

Step 7 – Ada hopes to receive $ 53.78M regardless of the 15% given to the management.

Step 8 – So, she decides that she needs to own: 42.18% of the company. [Calculation: $53.78M/$ 127M = 42.18%]

Now, let’s answer the questions:

How many shares would Ada require for this investment?

Ada will need:

X / (1,000,000 + X) = 42.18%

X = 421,800 + 0.4218.X

0.5782X = 421,800

X =  729,505 shares

Pricing for each share:

$ 10M / 729,505 = $ 13.7/share

If John accepts this deal, he will need to issue 729,505 new shares at $13.7/share to Ada.

PCCW website

The PCCW case is good to analyse its valuation over the years and make a quick comparison to other telecoms’ valuation. However, even if the minority shareholders won the decision to block a privitization of the company by the major shareholders, it is hard to see that the share price of such company will increase.

During the Internet Boom, PCCW’s share was valued at HKD $ 129.25 (FEB 25th 2000). Today, the share is value at 3.33 (APR 27 2009).  The current value is 2.56% of the highest value PCCW ever got.

A lot of people who invested in PCCW during that time are losing significant amount of money now. 

Moreover, a lot of investors do not understand why the company shares declined during all these years, if the company is still doing well and making profits. The lack of transperancy of why the value decline over the years and maybe a lack of good PR made all these PCCW buy-out case unavoidable. 

In Hong Kong, a lot of investors are angry because some of them are losing their life savings with this situation.

But, come on, we are almost in 2010 and I would never invest in a company that is still using a Netscape Favicon in its corporate website! 

PCCW with Netscape Innovation

It is expected that a telecom company innovates over the years. Maybe that is one of the reason why the company’s share value didn’t increase over the years. Also, as you can see from the chart, PCCW’s share never recover from the Internet Burst in 2001. The AOL + Time Warner stocks behave the same.

Time Warner and AOL stocks

This is an interesting case for Private Equity. PCCW has a virtual monopoly in the Hong Kong’s market. Technically, it should have a better stock price because it is not an internet company but a telecom giant. A similar company would be Telefonica.

Telefonica Stock Price

In case of Telefonica, the company (even with all the splits and etc.) increased its value from 2002 to 2007. It is, somehow, expected that other telecom companies do the same (check AT&T). But after a little bit of more research, most of other telecom companies in the world follow the same pattern PCCW has. Most of them had a great valuation from the internet boom and after the burst, the stock price never recovered (Deutsch Telecom, France Telecom, Verizon, etc.) I suspect that this indicates a lack of technological innovation. 

Anyway, the minoriy shareholders are not happy with the current stock valuation and they still hope that the share value increase in the future.

I made a screenshot from PCCW’s website about the PCCW case, when the HK government reverted the decision of allowing PCCW major shareholders to privatize the company.

Maximizing Share Holder Value

It is kind of strange the idea of maximizing value for all shareholders by buying them out (or inviting them to be out of the company).

Based on this, it is hard to believe that the PCCW value will have chances to increase. Instead, shareholders should have quitted the investment after the internet burst, limiting the losses. However, most people have the “sink cost” behavior. They think they should continue in the investment because they lose a little bit before and they hope they will have the chance to recoup the loss later. But in most of the time, it is better to lose a little bit than almost everything at hand. 

Original Text from The Economist:

The PCCW buy-out in court

The PCCW case - Split decision

A guide in Tibet

This is a complete guide of all the most important resources about venture capital industry in Canada.

It is a good way to start your research about VC industry if you are in Canada. 

What Venture Capital is?

http://en.wikipedia.org/wiki/Venture_capital

Associations, Networking and Groups

The National Venture Capital Association (NVCA), comprised of more than 450 member firms, is the premier trade association that represents the U.S. venture capital industry.

The CVCA – Canada’s Venture Capital & Private Equity Association – represents the majority of private equity companies in Canada, with over 1700 members.

Ottawa Centre for Research and Innovation (OCRI) is Ottawa’s leading member-based economic development corporation for fostering the advancement of the region’s globally competitive knowledge-based institutions and industries. 

The Institutional Limited Partners Association is a not-for-profit association committed to serving limited partner investors in the global private equity industry by providing a forum for: Facilitating value-added communication, Enhancing education in the asset class and Promoting research and standards in the private equity industry.

The Emerging Markets Private Equity Association (EMPEA) is an independent, member-based global industry association that promotes greater understanding of and a more favorable climate for private equity and venture capital investing in the emerging markets of Africa, Asia, Central/Eastern Europe and Russia, Latin America, and the Middle East.

Venture Capital Firms in Canada

http://www.chimkan.com/2009/04/20/venture-capital-firms-in-canada/

News about latest deals

http://www.canadavc.com/Default.aspx

Other Resources

British Columbia Venture Capital Programs - http://www.cse.gov.bc.ca/MIT/SBIIO/VCP/Pages/default.aspx

BDC Venture Capital - http://www.canadabusiness.ca/servlet/ContentServer?cid=1081944191273&pagename=CBSC_FE/display〈=en&c=Finance

Entrepreneur first - http://www.bdc.ca/en/home.htm

Strengthening Venture Capital in Canada - http://www.fin.gc.ca/toc/2003/svcc_-eng.asp

How Startups will save Venture Capital in Canada

Terms and Conditions for the Venture Capital Exemption - http://investcan.ic.gc.ca/en_terms.htm

Screenshot of the Introduction to Venture Capital online course

I registered for the Introduction to Venture Capital (Online) course at UCLA Extension course.

This is a self-study online course for $45. Not expensive.

Let’s see what it has. More comments in the next posts.

Actually, after 1 hour of reading the self-learning material, I finished the whole course.

The material is direct though it is very basic. It explains the sources of venture capital, the differences of angels and VC firms, then it explains briefly the due diligence process, the type of startups (lifestyle, middle, high-potential), when to startup finding financing and that’s it.

It has quizzes to see if you learned something and there’s nothing else.

I was expecting something more.

Some key points:

• The 10 bear markets since 1950 have bottomed down 20% to 57% (current) off the peak.  The current bear is by far the worst since the Great Crash, which bottomed down 89%.
• The bear phases of these markets lasted from 3 – 30 months (we’re currently in month 17).  The drop from 1929-1932 was also about 30 months.
• Most of these markets offered some sort of “retest” of the low.  Importantly, however, some did not.  (As always, beware confident “technical” analysts)
• As this additional chart from Doug shows, the S&P is now trading about in-line with its long-term price trend after 15 years of trading above it.  So even if we have put in the bear-market bottom, it is likely that the S&P will eventually trade below trend for a considerable period of time.

Read it more here: http://www.businessinsider.com/henry-blodget-chart-of-the-day-how-bear-markets-end-2009-4

venture-capital-courses