Although not as popular and well known as the summer Olympics, the winter Olympics is being held in the beautiful city of Vancouver. Canadians are very excited for this big event.

I was curious to know that there are some athletes representing Brazil in the winter Olympics. We do not have snow in 99% of the Brazilian territory and the winter is not as harsh as in Canada. It is quite hard to develop a strong winter sport team in Brazil due to the climate. It would be very expensive to maintain artificial winter conditions in such a hot country.

I guess the Brazilian athletes train in Canada.

The Brazilian Carnaval happens once a year and it usually starts on a Friday and it goes until the mid-day of Wednesday. Carnaval dates change according to lunar calendar, which is the same one used for the Chinese new year.

Chinese new year happens according the the lunar calendar. The new year can happen at the end of January or the end of March depending on the lunar cycle.

The Google China website is slightly different from the traditional minimalist look of Google. I think that the minimalist concept is very challenging for the Chinese aesthetic point of view. Take a look at one of the most popular website in China. If you compare Google’s homepage and Sina.com.cn’s website, you can see that Google may give an impression that something is missing in the eyes of a Chinese.

However, nothing beats the cuteness and fluffiness of a typical Japanese website (http://lolipop.jp).

Happy new year (year of tiger), Carnaval and Winter Olympics!

RKP9PJUU7JTD

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.

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/.

Quality of Life Index 2009

Read more here.

Nexus One Homepage

Google launched its official cellphone with Android operating system today. It is entering the smartphone market by providing a free OS to cellphone and aligning with manufacturer to provide a better user experience through better applications and superior hardware.

Google may reach a dominance in the smartphone market if it can have more manufacturers using its OS. However, manufacturers are not going to rely 100% in one software company. At the same time, most industry players do not have core competency in software development, thus they may rely on Google Android this time.

Meanwhile, iPhone is growing and Blackberry is responding to the new threats in the market. Nokia and other cellphones company are losing ground. It is an interesting time for this fast changing industry.

My 2 cents.

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.

= A must see.

= A firm dedicated mostly in early stage companies.

= Firm that invested in any startup in the last 3 months (from September 09). You can click the icon to see the news related to the investment.

= Firm that received fund or selected to participate or manage a province venture capital fund in the last 2 months. You can click the icon to see the news.

= Firm that sold or IPO a company in the last 3 months (from September 09).

VC firms only

Anges Québec

AVAC Ltd.
Avrio Ventures Management Corp.

Blackberry Partner Fund

Bootup Labs NEW INCLUSION!
Brightspark Capital
Business Development Bank of Canada (BDC) Venture Capital

Canadian Medical Discoveries Fund Inc.
CAPE Fund/Fonds CAPE

Celtic House Venture Partners
CentreStone Ventures Inc.

Covington Capital Corporation

Desjardins Capital de risque

Discovery Capital Management Corp.

Elgner Group Investments Ltd.

Emerald Technology Ventures

Fond de Solidarité FTQ

Foragen Technologies

Flow Ventures NEW INCLUSION!

Genesys Capital Partners

Greenstone

GrowthWorks

GTI Capital

Hargan Ventures

ID Capital Management Inc.

InNOVAcorp – Halifax

Innovatech Québec

iNovia Capital Inc.

Investeco Capital Corp.

J.L. Albright Venture Partners (JLA)

Jefferson Partners

JOG Capital Inc.

Lumira Capital

McLean Watson Capital Inc.

Mercator Investments Limited

Montréal Startup

MMV Financial Inc.

Multiple Capital Inc.

New Brunswick Innovation Foundation

Novacap

Ontario Venture Capital Fund (OVCF) 

Propulsion Ventures Inc

Rogers Ventures

RBC Venture Partners

Renewal2 Investment Fund

RHO Venture Capital

SAINT – Saskatchewan Angel Investor Network

Skypoint Capital Corporation

Springbank TechVentures

Société Innovatech Québec

Summerhill Venture Partners

Tandem Capital

Tech Capital Partners Inc.

TELUS Ventures

Trellis Capital Corporation

VanEdge Capital

Venture Coaches

Ventures West Capital Ltd.

Walsingham Fund

WesleyClover

Yaletown Venture Partners

These guys are great in doing info visual stuff.

http://www.blog.biggerpicture.dk/our-history-visualized/

Spudaroo.com

Spudaroo.com is a website that allows people to pay 3rd parties to create website documents, business plan, blog content, slide presentation, and even resume for lazy people. This is a Canadian startup and I wonder how effective is to outsource this type of work to others. I can’t imagine someone who doesn’t know me to write up my resume. Even worse, it is not a great idea to ask someone else to write a business plan for you if that other person doesn’t know the business or the industry at all.

Lastly, I think the name is really hard to spell and search on Google. Though, it is creative.

http://nomaine.com/

The Science of Managing Search Ads

There is an amazing article about Google AdWords from the New York Times.

It illustrates the management of an online campaign in AdWords for a company called Tiny Prints. This company advertisers on Google and gets a substantial part of its revenue and customers from AdWords. The company has stopped advertising for a day, trying to decrease its acquisition cost, but it ended up losing customers and allowing competitors to grow. Its management team decided to advertise again and it started to manage its campaign more closely, balancing the ads spending, competitors’ bids and profits.

The article gives an accurate view of how advertisers live with AdWords. To have success in that platform, you need to have quick decision, money and knowledge to use this powerful tool.

Read more here: The Science of Managing Search Ads

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?

http://penzu.com/

This is strange. A Canadian company created a blog system that provides private blog posts as a default choice. This means that users of this blog system will create their blog post privately and not sharing to other people. This defeats the notion of blog because blog’s main objective is to share and not to hide. Also, Wordpress and even Blogger provide privacy settings that block the public access to blogs or specific blog posts. So, there should be no need to create a service specific for that. Maybe, this is an indication of asymmetric information.

http://sprouter.com/

Sprouter is a social network that connects entrepreneurs around the world. It is one of those website for grass-rooting campaigns for entrepreneurs to share their ideas. I’m not sure if that’s effective given that there are many social network dedicated to the same thing.

http://tinychat.com/

Tinychat provides free video and audio chatroom for the mass. People can use this tool as a DJ room, virtual meeting presentation room or live interactive TV. I like this website because it’s free and for startups, this tool can connect our team member even if they are in different parts of the world. I think this is a Webex competitor only that Webex is focused on corporate customers and Tinychat is focused on the consumer customers.

If this service catches on, it would be a great acquisition target for big companies like Cisco, Google, Microsoft and even Yahoo. I believe that with the adoption of higher speed internet network and the integration of video and audio into gadgets, the reality is that people will prefer to use video and audio to communicate rather than writing, SMS or IM.

Traditional approach to online marketing

Basically, it treats publishers and ad inventory from ad networks as suppliers and the demand is generated from advertisers’ needs. interClick than provides a system that control, monitor, and optimize the ad spending.

It raised $18 million! It is not clear how different this system is from other well established players, such as Doubleclick, Atlas, etc. Most of this one-stop platform monitoring systems are also ad servers. The integration of ad server is an important technical aspect of the monitoring and optimization process of online marketing campaign.

The ad server provides the user, ad and result tracking. It tells us about where the ad was clicked and if that ad generated a sales or not. Most monitoring systems use those data and provides meaningful reports and some of them provide tools to manage campaigns more effective.

I’m not sure how if there’s a space for one more player.

InterClick Website

From Silicon Alley Insider:

via Nasdaq’s Only “Pure-Play” Ad Network Raises $18.1 Million (ICLK).

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

Before getting into the list, I want to make it clear that private equity investments are much stronger than venture capital investments. There may be four reasons for a small venture capital market in Brazil:

High interest rate – competition for capital, government bonds are much safer and provide better return, the current real interest rate is over 8%.

Entrepreneur unwilling to exchange equity for capital – the idea of having a 3rd party controlling or on the verge of controlling someone’s company is not very common yet.

Venture capital is unknown – the word venture capital is not a very known word in Portuguese, some people call venture capital as Capital Empreendedor or Capital de Risco in Portuguese. A literal translation of those two words is  entrepreneur capital or risk capital respectively (capital risque in French and riskkapital in Swedish). The meaning of risk is too explicit in those words.

Capital competition from other source of funding – there are big private equity firms and very wealthy individuals that can take the risk of new ventures easily, the capital is highly concentrated.

Sao Paulo - Copan

That is why there are not many venture capital firms that have look and feel of a American or Canadian venture capital firm in Brazil.

Here are some of them:

Monashees Capital + – currently with 7 portfolio presented to the public, Monashees is one of the two firms that fit into the typical venture capital firm (early stage investment, nurturing startups).

Adrenax Capital – this is new for me. It is dedicated to early stage and high-tech investments. This is the second firm that fits into the definition of a typical venture capital firm.

FIR Capital – a hybrid of venture capital and private equity firm, linked to DFJ.

Ideiasnet – This is a hybrid of incubator and venture capital firm.

Rio Bravo - imagine Goldman Sachs + Carlyle + Sequoia in one single firm.

Green Capital – private equity in green tech. Green tech is usually related to agro and ethanol industries in Brazil.

Invest Tech – a fund that invests in technology firms.

DGF Investimentos – it is a venture capital and investment fund firm.

Brazil is such a big country and I am puzzled to see that the venture capital industry is still so small. If the Brazil’s economy continues to rise, maybe there will be market space for more venture capital firms. Also, Brazilian people are known to be very creative and talented. There is no lack of talents for development of new technology and companies.

Lastly, most of the venture and investment firms are located in Sao Paulo. If you are interested in investing in Brazil, this is your city.

If you have any interest to know more about current condition of investing in Brazil, please drop a comment and I will post more things about it.

http://squareup.com/

Square is a startup based in San Francisco and promised to revolutionize the payment for small and medium size companies. It provides an almost free add-on to your iPhone, so you can slide your customers’ credit cards and the iPhone will take care of the payment transfer from the credit card into your Square account.

They are offering the device for almost free because they gain money through each transaction.

The idea of mobile payment is not new, but this is a strange and somewhat innovative way to make payments. However, there will be more competition for micro-mobile-payment systems and I’m not sure if this is a definite winning proposition. The mobile payment system is really well developed in Japan and some parts of Scandinavia and they do not need to use any add-on system to make transaction. Most of the cellphones in those countries have microchips that register payments to the carrier. The carrier becomes the middle man in the business.

If that’s true, the mobile carriers could release a mobile payment system that avoids the use of the add-on device. That would block the development of this company.

But, maybe this company is just growing in a way that will sell itself to those big carrier companies. Who knows?

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.

Maybe I should investigate more on this area. There are still a lot of money in this industry.

VENTURE CAPITAL – DealBook Blog – NYTimes.com

via Bizo, the B2B Platform, Lands $6 Million.

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

——————————————————————————–

Share and Enjoy:

]]> http://www.chimkan.com/2009/12/13/stribe-fast-response-to-my-previous-post-about-its-product/feed/ 1 http://www.chimkan.com/2009/12/13/should-us-give-visas-for-venture-backed-immigrant-entrepreneurs/ http://www.chimkan.com/2009/12/13/should-us-give-visas-for-venture-backed-immigrant-entrepreneurs/#comments Sun, 13 Dec 2009 17:10:03 +0000 Chim http://www.chimkan.com/?p=787 The idea is very simple. People could apply to stay in the US if they have a business idea backed by investors in the US.

In a simple perspective, this seems to be a good idea to boost entrepreneurship in the US. However, aren’t there already many good entrepreneurs in the US? Also, a lot of people would try to immigrate to the US through this way, but without a real business plan. This would definitely undermine the main objective to bring innovators into the country.

Read the original article at BusinessWeek Online – Visas for Venture-Backed Immigrant Entrepreneurs.

http://www.stribe.com/

People from the Le Web 2009 in France was making such a fuss for Stribe. Stribe is a company puts a social network bar in your website. Basically, people who are signed in to the Stribe network will be able to have social network experience in websites that installed their Stribe social bar.

http://developers.facebook.com/connect.php

http://www.google.com/friendconnect

Honestly, this is similar to what Facebook and Google Friend connect already provide. These services allow publishers or website owners to know who the visitors are by asking users to sign-in using their Google or Facebook account. Then, the FB or Google Friend Connect bar can link people who are visiting that website and provide guestbook and comment tools to the publishers.

I don’t know what the differentiations from Stribe, FB Connect and Google Friends Connect are.

Plus, when you install these bars, your website gets slower because the user has to load the extra bar in your website. I do not advise installing this for now. Check my new post: http://www.chimkan.com/2009/12/13/stribe-fast-response-to-my-previous-post-about-its-product/

VC Pitch Tip #1 – Turn off your screen saver
VC Pitch Tip #2 – You won’t be eating much lunch during that “lunch” meeting
VC Pitch Tip #3 – Get to the venture capitalist’s office early
VC Pitch Tip #4 – You don’t need to wear a tie to meet with an early stage venture capitalist
VC Pitch Tip #5 – The Venture Capitalist will want to hear a lot about your team
VC Pitch Tip #6 – Bring a USB drive with your pitch saved on it
VC Pitch Tip #7 – Format your financial model for printing
VC Pitch Tip #8 – If you are going to use WebEx to during your venture presentation, send the slide deck over email ahead of time and have a direct phone line available
VC Pitch Tip #9 – Don’t show the VC the IRR they will get
VC Pitch Tip #10 – Technology venture capitalists love demos
VC Pitch Tip #11 – Keep the actual slide deck short but sweet
VC Pitch Tip 12 – Be able to complete your entire fund raising presentation in 10 minutes

Read more at Startable

via Pitch tips for venture capital meetings.

Startup Drink Canada

There is a new event called Startup Drinks and it is a new way to gather entrepreneurs in some vibrant cities across Canada. I wish they have one in London, ON. Maybe, I could ask some people to bring this event here.

From FLOW Ventures

via Startup Drinks CA is live!.

However, that did not stop entrepreneurs to come up with more startups. A lot of entrepreneurs created other viable ways to make money on the internet. One of the most interesting way is the Make-Your-Own-Stuff Web 2.0 companies. They are characterized by Ajax site structure with big buttons and fonts and crowdsourcing or customization features in their websites. They make money by selling cool things that a lot of people like. Some companies sell t-shirts, mugs or print arts for your iPhone.

I’m going to present four companies that fit in this Make-Your-Own-Stuff Web 2.0 category:

Threadless home page 2009 winter

Threadless is a company that sells crowdsourcing designed t-shirts (from Chicago). Simply, people send their t-shirt designs; other people vote for the best and cool designs; Threadless make t-shirts from those winning designs to the mass. People buy them. [This is a classic successful web 2.0 company that relies on crowdsourcing and social interaction.]

Gelaskins Canada Startup Homepage 2009

Gelaskins is a Canadian company that sells cellphone and other electronic gadget special skin protection with very interesting design. They have a lot of designers that create cool designs for all those cellphone protectors. The protectors are made of a special plastic-rubber easy to remove and glue that not only make your iPhone or Blackberry more beautiful, but also protect your gadget from scratches. [Great potential to grow.]

Scarfmaker an Estonian startup

Scarfmaker.com is a startup from Estonia and it allows users to customize scarf with their own designs. I think the idea is great and it may grow very very fast. Currently, I think the company is backed by Swedish VCs. I will be watching the developing of this company.

Crazy Custom Caps Home page 2009

Crazy Customs Caps is a typical company that offers customized caps. There are many many companies that allow people to create customized caps but not many of them set up a website. Although, the idea of this company may not be original, the business framework of allowing users to customize their products is definitely catching on in the web 2.0 landscape.

All these companies belong to the e-commerce category of money making website, but they are able to compete against big players because they have a special value proposition to customers. Most of them offer unique items created by the crowd or by user’s customization of the product. Interesting niche market.

I chose the What’s the best profession for me quiz. It started showing me the following questions:

And I’ve got the results here.

Windside – A Different Kind Of Wind Turbine.

Read more: http://www.arcticstartup.com/2009/11/13/windside-a-different-kind-of-wind-turbine/

There is a very interesting Startup Acceleration Program in Helsinki, Finland, that provides advisory services, private network of investors and tools for negotiation, growth, etc for entrepreneurs with great ideas. All these three services are for free! I wonder if they could have something like this in Canada.

Arctic Startup

via Sponsored: New Kind Of Acceleration For Startups.

Thanks for Dan M., JS C., Mark E. and Tim T. for your suggestions!

This is a complete list of all the VC firms in Canada. JS made a good suggestion of adding of which firms invested in the last 12 months. I will add this info in the next update.

= A must see.

= A firm dedicated mostly in early stage companies.

= Firm that invested in any startup in the last 3 months (from September 09). You can click the icon to see the news related to the investment.

= Firm that received fund or selected to participate or manage a province venture capital fund in the last 2 months. You can click the icon to see the news.

= Firm that sold or IPO a company in the last 3 months (from September 09).

VC firms only

Anges Québec NEW INCLUSION!

AVAC Ltd.
Avrio Ventures Management Corp.

Blackberry Partner Fund NEW INCLUSION!

Brightspark Capital
Business Development Bank of Canada (BDC) Venture Capital

Canadian Medical Discoveries Fund Inc.
CAPE Fund/Fonds CAPE

Celtic House Venture Partners
CentreStone Ventures Inc.

Covington Capital Corporation

Desjardins Capital de risque

Discovery Capital Management Corp.

Elgner Group Investments Ltd.

Emerald Technology Ventures

Fond de Solidarité FTQ NEW INCLUSION!

Foragen Technologies

Genesys Capital Partners

Greenstone

GrowthWorks

GTI Capital

Hargan Ventures

ID Capital Management Inc.

InNOVAcorp – Halifax NEW INCLUSION!

Innovatech Québec

iNovia Capital Inc.

Investeco Capital Corp.

J.L. Albright Venture Partners (JLA)

Jefferson Partners

JOG Capital Inc.

Lumira Capital

McLean Watson Capital Inc.

Mercator Investments Limited

Montréal Startup NEW INCLUSION!

MMV Financial Inc.

Multiple Capital Inc.

New Brunswick Innovation Foundation

Novacap NEW INCLUSION!

Ontario Venture Capital Fund (OVCF) 

Propulsion Ventures Inc

Rogers Ventures NEW INCLUSION!

RBC Venture Partners

Renewal2 Investment Fund

RHO Venture Capital NEW INCLUSION!

SAINT – Saskatchewan Angel Investor Network

Skypoint Capital Corporation

Springbank TechVentures

Société Innovatech Québec

Summerhill Venture Partners

Tandem Capital NEW INCLUSION!

Tech Capital Partners Inc.

TELUS Ventures

Trellis Capital Corporation

VanEdge Capital NEW INCLUSION!

Venture Coaches

Ventures West Capital Ltd.

Walsingham Fund

WesleyClover NEW INCLUSION!

Yaletown Venture Partners

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.

= A must see.   = A firm dedicated mostly in early stage companies.

VC firms only

AVAC Ltd.
Avrio Ventures Management Corp.
Brightspark Capital
Business Development Bank of Canada (BDC) Venture Capital
Canadian Medical Discoveries Fund Inc.
CAPE Fund/Fonds CAPE

Celtic House Venture Partners

CentreStone Ventures Inc.
Covington Capital Corporation

Desjardins Capital de risque

Discovery Capital Management Corp.

Elgner Group Investments Ltd.

Emerald Technology Ventures
Genesys Capital Partners
Foragen Technologies
Greenstone
GrowthWorks

GTI Capital
Hargan Ventures

ID Capital Management Inc.

Innovatech Québec

iNovia Capital Inc.

Investeco Capital Corp.

J.L. Albright Venture Partners (JLA)

Jefferson Partners

JOG Capital Inc.

Lumira Capital

McLean Watson Capital Inc.

Mercator Investments Limited

MMV Financial Inc.

Multiple Capital Inc.

New Brunswick Innovation Foundation

Ontario Venture Capital Fund (OVCF)

Propulsion Ventures Inc

RBC Venture Partners

Renewal2 Investment Fund

SAINT – Saskatchewan Angel Investor Network

Skypoint Capital Corporation

Springbank TechVentures

Société Innovatech Québec

Summerhill Venture Partners

Tech Capital Partners Inc.

TELUS Ventures

Trellis Capital Corporation

Venture Coaches

Ventures West Capital Ltd.

Walsingham Fund

Yaletown Venture Partners

= A firm dedicated more to Private Equity or late stage startups.  = A mix firm with investment in VC and PE.

PE and VC firms

32 Degrees Capital

Aberdeen Gould

Annapolis Capital Limited

ARC Financial Corporation

Argosy Partners – Shotgun Fund & Succession Fund

AXIS Investments Fund

Balaton Group Inc.

Banya Capital Partners

Bedford Capital Limited

Birch Hill Equity Partners

BMO Capital Corporation

C.A. Bancorp Inc.

CAI Capital Management Co.

Caisse de dépôt et placement du Québec

Canada Pension Plan Investment Board

Canterbury Park Capital L.P.

Chadbourne & Parke LLP

Clairvest Group Inc.

Cobalt Capital Inc.

Coller Capital Limited

Cordiant

Corum Group

Crown Capital Partners Inc.

DAI Capital Advisors Inc.

EdgeStone Capital Partners

EnerTech Capital Canada Ltd.

Hilco Consumer Capital Corp.

Kensington Capital Partners Limited

KERN Partners Ltd.

Killick Capital Inc.

Kilmer Capital Partners Limited

Integrated Partners

Latitude Partners Incorporated

Lions Capital Corp.

Invico Capital Corporation

JMI Equity

Manvest Inc.

Mosaic Venture Partners

Novacap

OMERS Private Equity

ONCAP L.P.

Osprey Capital Partners

Penfund

PFM Capital Inc.

Pinnacle Capital

PRIVEQ Capital Funds

Scotiabank Private Equity

Stable Capital Advisors

Summer Street Capital Partners, LLC

TD Capital Private Equity Investors

Teachers’ Private Capital

Torquest Partners

Tricor Pacific Capital, Inc.

TriWest Capital Partners

Turtle Creek Private Equity

Vancity Capital

Victoria Park Capital Inc.

Whitecastle Private Equity Partners Fund LP

Wynnchurch Capital, Ltd.

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.

MaRS

Mars

Entrepreneurship 101

Stanford University

Entrepreneurship Corner

Entrepreneurship Corner

Business Association of Stanford Entrepreneurial Students (BASES)

Business Association of Stanford Entrepreneurial Students (BASES)

Stanford Technology Ventures Program

Stanford Technology Ventures Program

Carnegie Mellon University

Entrepreneurship and Business Planning

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

Share and Enjoy:

]]> http://www.chimkan.com/2009/10/21/resources-to-support-entrepreneurs/feed/ 0 http://www.chimkan.com/2009/10/21/venture-capital-highlights-%e2%80%93-2009-%e2%80%93-week-42/ http://www.chimkan.com/2009/10/21/venture-capital-highlights-%e2%80%93-2009-%e2%80%93-week-42/#comments Wed, 21 Oct 2009 22:32:40 +0000 Chim http://www.chimkan.com/?p=675

Compared to others

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.

5 tips for choosing a co-founder

Stanford and its $ 1 billion sell-off of private equity

Stanford Said to Offer Sequoia, Kleiner Funds as Prices Recover

US investment in VC decreases to new low levels

Investments in U.S. Venture Capital Funds Plunge

Potential recover for the VC industry

Signs of life in venture capital

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.

The Foreign Affairs and International Trade Canada has a very interesting boot camp for entrepreneurs on September 10, 2009 in Saskatoon, Saskatchewan.

If you have a business plan and you want to meet with VCs from California, you should go there.

For more information, visit: http://www.infoexport.gc.ca/eng/sask/document.jsp?did=96015 and contact Alison.

I suggested to Alison to create a similar event but with video conferencing. Given the distances in Canada, the video conference would allow people from all over Canada to participate it with a minimum of cost and time. Also, more VCs could join in from the States and elsewhere.

For all of those interested in startups, there is going to have an interesting event for entrepreneurs and venture capitalists on October 15th 2009 in Montreal. Here are the details:

Date : October 15th, 2009
Time (Unconference session) : 3pm to 6pm EST
Time (Standard Conference) : 6pm to 11pm EST
Location : SAT – Société des arts technologiques
Address : 1195 Saint-Laurent boulevard, Montreal Google Map

For more information, click here.

The trouble with venture capital

There is an article from the Financial Posts (a prestigious finance newspaper in Canada) that backs the idea that there are too much money in the venture capital industry. It says almost the same thing from my older post that the VC industry must shrink in order to get a higher return to investor. Read the older post here: http://www.chimkan.com/2009/06/18/kauffman-foundation-says-u-s-venture-capital-industry-must-shrink/

Canada - USA - Niagara Falls

People in the venture capital industry know that the VC industry is not going well in Canada. That is why it is even more important to know the situation in a quatitative point of view.

The SME Financing Data Initiative is a government website that publishes quarterly reports about the venture capital industry in Canada. The summary is that the level of investment and funding is the lowest since 2003.

VC investment and fundraising, Q1 2008 and Q1 2009

There is an increase in the number of investment in the seed stage startups. However, all other stages of deals fell.

VC investment by stage of development, Q1 2008 and Q1

Also, you can see better how the distribution deals in Canada per provinces is.

Number of companies receiving VC by province, Q1 2008 and Q1 2009

I haven’t added all the number, but the impression that I have is that the venture capital activities in Canada is decreasing significantly. You can read the whole report here: http://www.sme-fdi.gc.ca/eic/site/sme_fdi-prf_pme.nsf/eng/h_02156.html

I took the report from the Money Tree Report from PriceWaterHouseCoopers and there is a lot of interesting results.

According to the report, the number of deals remained flat but the value increased slightly compared to Q1. But if we compared to Q2 2008, the value of investment drop 48.6%. In this perspective, Canada is not doing that bad at all.

Number of deals in US

Another interesting fact is that the number of seed stage investment increased as in Canada.

Seed investing increasing

This is actually good news. The more we invest in early stage company, the more growth we can expect in 3 – 5 years. So, those who want to gain fast money should not get into the venture capital industry now. But, it is important to get into this industry now to invest in new companies and expect a good exit in 3-5 years; this is the average needed time for a company to mature for an IPO.

The current situation in the VC industry is not good. But, actually, this is a good opportunity to have a readjustment in the industry, lower the valuations and we may have a better return from the portfolio companies in the next 3 -5 years.

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.

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!

There is a news from the CNET that tells that Smartphones and low-cost handsets will keep dominating the wireless market. The post tells that despite the fact of economic downturn, demand for smartphone remained high and this category grew 27% compared to the same quarter a year ago. Also, smartphones have been the fastest growing segment of the mobile industry. Moreover, the prices for smartphones have been decreasing steadily in the last 5 years.

In my experience, smartphones were quite expensive. For instance, Palm Treo 700p was launched on 2005 and its price was around $650.00 with a two year contract. Now, you can get an iPhone with 8G with two year contract for about $99.00. I am not even counting the fact that we can do more things in the current generation of phones and we have more services than in the past.

Palm Treo 700p with two year contract around $650.00

From Gartner report from 2008, Market Share: Smartphones, Worldwide, 4Q08 and 2008, the Global sales of smartphones in 2008 reached 139.3 million devices, up 14% compared to 2007 . The smartphone market is definitely growing. It is expected that with the economic rebound, people will upgrade their mobile phones and they may buy more smartphone if the service costs and the phone become cheaper.

Looking at the Table 4, Worldwide: Smartphone Sales to End Users by Operating System, 2008 from Gartner, we can see that in spite of the 13.9 growth for the overall smartphone market, Research in Motion and Mac OS X grew really well with 96.7% and 245.7% respectively.

Smartphone market landscape 2007 - 2008

This type of growth is similar to what happened with the PC industry during the 80s and 90s.

As you can read these excerpts:

Chip makers post record results bolstered by booming PC sales

HOME COMPUTERS, 1994

PC Sales Over Holidays Rose 33% From '93 Level, 1994

Strong Gains For U.S. PC's, 1995

As you can see 1994 and beyond were the years when the PC industry had the greatest growth in history. The growth relied on the consumer market. While B2B has always been the initial driver of the PC industry, the B2C market was essential for the popularization of the personal computers.

Also, late in the 1997, the PC manufacturers started to sell PC in the sub-$1,000 category. This happened at the same time with the first big internet growth (Yahoo!, Amazon.com, etc.) and the high adoption of internet. In the following graph from ITU, the internet user’s rate grew 70% (the blue line from 97 and 98).

Internet users per 100 inhabitants 1997-2007

Also, the sales of PC grew immensely with the introduction of PC that cost less than $1,000.

Sub-$1,000 PC sales soar

As you can see from 25-Years PC Anniversary Statistics , the number of units of PC sold jumped from 5.7 million in 1981-1985 to 1,540 million in 2001-2006. That is a 27 times growth!

25-Year PC Anniversary Statistics

25-Year PC Anniversary Statistics Chart

Although, we do not have the power to see the future, there are some patterns from the PC industry that shows us that the smartphone industry will also have a spectacular growth. Definitely, there are differences, such as the number of operating systems and platform and also the fact that in the wireless industry, the manufactures and the carriers have a big say in the definition of the market, but undoubtedly, smartphone will growth.

And if the smartphone market grows as big as the PC industry, there will be a lot business opportunities and innovation.

Basically, we can classify venture capital firms with 3 criteria: industry target, fund’s size and preferred investment stage.

Most of the VC firms are specialized in a set of industries. Some firms are dedicated into internet startups such as Brightspark and some others that invest in proven general technology companies such as EdgeStone. Usually, VC firms specialize in specific sectors because they can build a strong knowledge of an industry and they can spot good opportunities and support portfolio firms easily.

Size of a fund is an important metric to classify VC firms. VC firms make money in two main ways: management fees and carried interests. The bigger the fund’s size, the bigger the reward for a VC firm. Also, for entrepreneurs, the fund’s size is a good indication of the amount of money the firm is able to invest. If an entrepreneur has a project that needs $10M, so an ideal VC firm would have a fund with over $100M (I will explain the rationale for this later in other posts).

Then, different firms have different investment strategy. Usually (though not a rule), small VC firms tend to invest in seed stage companies and bigger firms invest in growing and pre-IPO companies. If I were an internet entrepreneur and I don’t need that much money, I would go for a VC firms that specializes in seed stage internet company with a fund size under $ 100M.

This framework is important for entrepreneurs. Knowing how to differentiate VC firms can show readiness to a venture capitalist and you can easily explain why you are approaching that VC firm instead of the other.

I’m glad that I’m resuming my VC posts!

Happy Faces - I'm resuming my VC posts

Folha de Sao Paulo - Prestigious newspaper in Brazil

It is nostalgic to see some of my texts written for Folha de Sao Paulo in 2003, a prestigious newspaper in Brazil.

I worked for a couple of time and I wrote technology news, such as new wireless and mobile services, reviews about new notebooks, digital camera and printers and big technology expositions, for the newspaper. It was a great experience to work in one of the most respected and trusted newspaper in Brazil. Also, I was a huge fan of the newspaper, so knowing how the company works was great.

This experience laid a solid base of my PR and media sensibility.

Here are some of the news I wrote at that time (Portuguese only):

Serviço Download é novidade da Telesp Celular na Telexpo 2003
Câmera digital tira fotos e passa vídeos na rede
Câmera faz auto-retratos faz auto-retratos
Primeira impressão: Rede pode falhar ao enviar fotos

I hope I will be able to write news in some Canadian newspaper some day. Obviously, it will be about technology.

Thanks Googlers!

Last Friday (July 17th) was my last at Google as a AdWords Product Specialist in Brazil. It was a fun, growing, interesting, deep, challenging and awesome experience.

As a Google fan, I was lucky enough to work in the product development, engineering, marketing, project management, education, training and sales sides of this great company. I was able to see the wholeness of how this behemoth company works and the more I knew the company, the more I admired Google.

Besides that, I admired Googlers the most. Googlers are extremely smart, intelligent and nice to work with. They do have a really high standards about any kind of work. That environment challenged me to do my best and to grow even more.

It was sad my last day, but I believe I will see my coworkers from Google someday again.

Now, I’m focus on my MBA in Canada.

Some of my Google experience left on the Internet:

Novos Recursos do Google Analytics (in Portuguese only)
Google University – AdWords Além da Busca? – SMX Sao Paulo
Google Developer Days 2007

Evan Williams

I became aware of Evan Williams from Founders at Work: Stories of Startups’ Early Days. He had a great and very interesting story about how he founded Blogger and all the hardship he had with it. I think one of the most interesting point is the disagreement he had with the other founders and employees from Pyra Labs. Given the Internet burst, it was really hard to sustain Blogger at that time. The whole team, except Evan, left the company and he worked to have the company running alone for a couple of months.

From the book, you can see that he could sustain Blogger for a while by himself. This happened because there were some paid services from Blogger. Also, in the very beginning of the service, he had asked the users to donate money to buy more servers and other thing.

Of course, all of this became history when Google acquired Pyra Labs. Read more about this here: http://searchenginewatch.com/2165221

Not only, he could cash in his project, but he could develop Blogger in a very different way within Google.

However, he didn’t stay long. After 1 year and 8 months, he left the company by his own decision and he was planning to start another company. You can read his blog post about his decision to leave Google.

Instead of founding a very different company in a different industry, he founded a micro-blogging site that everyone knows now! Twitter.

It looks there is a pattern in the way how he works. He founds a communication platform company, the company gets huge buzz and he sells it to other company. Interesting indeed.

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!

Koenigsegg's car with Saab logo

I’ve been following many news related to the GM’s sale of Saab to Koenigsegg and I’m very curious about the outcome of this situation.

I searched Google to see if there was any news of small companies buying big companies and I couldn’t find any results to that, instead I found many news of big companies buying smaller firms.  Then, I made some changes in my query and I still didn’t get any results of small companies buying a bigger one. However, I’m sure that there are a bunch of history of small companies buying big troubled ones or at least their brands.

Two examples:

• Infogrames buying Atari, read more at Wikipedia.
• Rackable Systems buying Silicon Graphics, read more at Wikipedia.

As in this little research, most companies bought the troubling ones because of the brand. It is quite hard to see a small company buying a larger one because usually, small companies do not have capital to buy any company at all.

That is why it is fascinating to see the merger of Koenigsegg and Saab. Koenisgsegg sold only 20 cars around $1.2 million each last year. Meanwhile, Saab sold over 5o,000 cars units during the same period. Koenisgsegg is receiving many many support to acquire Saab. First, it has $600m loan from the European Investment Bank guaranteed by the Swedish government, and a dowry from GM in the form of platforms, powertrains and about $500m in cash and other assets.

Then, Saab’s Creditors agreed to write down 75% of their debt!

This merger looks more like this: GM and the Swedish Government “hired” Koenisgsegg to clean up or infuse a new life into the company.

I would love to see how successful this ‘marriage’ will be. Some cars enthusiasts’ sites say that it would be great to have Koenigsegg technology and hype infused into the Saab products. I wonder what Koenigsegg is thinking about this. Maybe, it would be great for them to have a platform where they can mass produce their extremely cool cars to the world.

However, there are many risks for this strategies. How could Koenigsegg adapt its designs into the production line of Saab and how the small Koenigsegg’s team can hope to manage the bigger and fatter Saab management and company’s structure?

I wish them luck!

News related to Saab and Koenigsegg sale:

Unstable Storm – Economist.com
Saab’s Creditors Agree to Sharply Write Down Debt
Koenigsegg buys Saab: The automotive gods may smile upon us once again
Google News: Saab & Koenigsegg
512-HP Koenigsegg Quant Solar-Electric 4-Seater To Enter Production
Geneva 2009: NLV Quant by Koenigsegg

Mr. & Mrs. Pump from Flickr

Summary:

The number of new funds focused on bankrolling early-stage startups appears to be growing.

Data from The Deal and other sources that focus on venture capital concluded that in the last six weeks that about $1.2 billion has been raised by firms for dedicated venture capital investment, with another $3.3 billion for funds-of-funds that will back new venture capital (and private equity) vehicles in the future.

VCs are planning to concentrate on finding IT startups with limited capital needs rather than late-stage companies that may need significant sums to ramp up production or to weather a downturn in business until the recession is over.

It’s not only entrepreneurs targeting the next generation of startups: Venture capital firms Spark Capital and Sequoia Capital each made moves toward increasing their funding, specifically for seed-stage companies, in late March.

Read more at: http://www.thedeal.com/dealscape/2009/05/new_venture_funds_focus_on_the.php

My comments:

1. Comparing the latest bad news related to VC industry with this one, it seems that some problem may arise.
2. VC firms are raising a lot of money, they will need to invest in many more companies.
3. Many firms with more money means that entrepreneurs may drive up the valuation.
4. However, given the economic crisis, people are more conservative in taking risky ventures (less people going for entrepreneurship).
5. The end result may that the current rate of return from VC firms may stay the same, but the amount of deals may shrink.
6. There is also a bad news from Obama’s new financial revamp which may limit the size or the freedom of how VC may work.

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

‘Super Angels’ Shake Up Venture Capital

Business Week has a great article about a type of angels investors called “super angels”. Although, the magazine didn’t state exactly in this way, super angels are high net worth individuals and small venture capital firms that invest around $ 1 million dollar in seed stage companies.

It illustrates the super angels with Josh Kopelman and his First Round Capital’s story.

The importance of this article is the visibility it gives to the venture capital industry and specially in this economic downturn.

I recommend reading it.

Read more here:

http://www.businessweek.com/magazine/content/09_22/b4133044585602.htm

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

Facebook is receiving $ 200 million for 1.96%!
 To calculate the post valuation, we just need to do this:

X = post-valuation
X = 200 million / 0.0196 = 10 204 million = $ 10 billion roughly.

Amazing how this company is able to draw more investment. 

Read more news about this event here:

Russian firm invests $200 mln in Facebook
What Is Facebook Actually Worth?
Why Facebook needs DST in Russia

- 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.

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.

- 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

Private Equity in London?

Private equity is a medium to long-term finance (10 years). Private equity firms provide money to companies in exchange of equity and control.

Venture capital funds are a type of private equity investment. The main specialty of a VC firm is in early stage companies.

Usually PE funds do leveraged buyout. These firms purchase all or a significant portion of the stock or assets of a company (public or private). They usually use debts from huge banks to buy the companies. That is why some of the operations are called leveraged buy-outs. Then, they try to improve the companies’ operational and financial performance and after a couple of years, they release the companies’ stocks to the market, expecting to get profit from it.

Most PE funds focus on firms with stable cash flow, high market share, undervalued shares and known industries.

Typically, a private equity fund life cycle is defined as:

- 0 to 1 year: Raise Capital
- 1 to 5 years: Investing in distress or interesting companies
- 5 to 10 years: Liquidation of the investments.

The liquidation can be done by the IPO of the private company.
As you can see, Private Equity investment is quite similar to Venture capital investment.

In general, private equity does not have liquidity, ownership is concentrated, valuation is difficult and finance is accompanied by control and mentoring. However, public equity has liquidity (people exchange equity for money easily), ownership is dispersed, valuation is relatively easy and finance is often separated from control and mentoring.

Material about Private Equity from the Internet:

Private equity - Wikipedia

PowerPoint Presentation about Private Equity
Private Equity.ppt
Presentation – Pvt Eqy – 2008 – Kalpana Jain
FundsRaisedStrcturedJan04
NYC Investment Fund-David Bowe.ppt
PowerPoint Presentation About Private Equity
Selling to private Equity.ppt
Legal Aspects of Private Equity- FINAL.ppt
 

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

It basically says that given the lower cost to create web companies, the current venture capital model may not be attractive enough for those web entrepreneurs. It gives some examples such as the iPhone Apps developers that do not need a huge  amount of money to create their products. 

However, it ends the article saying that is why some venture capital firms are changing its strategy by creating special funds for this type of development or some VCs creates smaller fundings specially designed for these web entrepreneurs.

I believe it is a must read for web VCs and entrepreneurs.

Sadia and Perdigão are forming one of the biggest food company in Brazil. It will be called Brasil Foods.

Sadia and Perdigão Merging to Brasil Foods

After a disastrous finance decision that Sadia made about currency investment last year, losing roughly $ 2 billion dollars, it had decided to merger with Perdigão, a similar size food company.

One of the things they will start to do is the release of  US$ 2 billion of new shares of the new company. The money will be used to decrease the company’s debt to US$ 3 billion from US$ 5 billion.

The new company will be the tenth biggest food company in the Americas. 

Brazil Foods will have over 120.000 employees with EBITDA of R$ 2.4 billion.

One of the biggest concern as a consumer is the possibility of monopoly. Both of the are strong players in the consumer food market in Brazil. They have over 70% of the frozen food market.

This is a very good example of the M&A market landscape in Brazil.

Leslieville is home to an array of cafes and antiques stores.

Toronto is a very international and diverse city. It is one of the biggest city in Canada with 2.5 million of people (Greater Toronto has 5.6 million). 

I went there three times in my life and I have to say that it has its own big city charm with its Eaton Center and the Queen West District. Compared to other Canadian cities, it has a metropolitan vibe with its traffic and people rushing to schools, work and entertainment. 

It has a strong theater, music, painting and modern art scene. 

You should read the New York Times ‘36 Hours in Toronto‘ and follow its recommendation of how to visit this pretty city.  Also, visit my Google Maps that I created based on the article.

Many of you may not like Microsoft, but most people are sure that Microsoft’s CEO, Steven Ballmer, has a strong leadership presence in the company and in the market.

There is an interesting short interview from New York Time with Steven. He talks about leadership, job interview, what he is looking for at Microsoft and he gave some recommendations for b-schools.

Read his interview at: http://www.nytimes.com/2009/05/17/business/17corner.html?pagewanted=1&ref=technology

Differnces of VC and PE

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. 

However, private equity firms usually invest in early stage startups when the economic condition is great. 

So, the difference between the two are somewhat blurred in any economic condition.

Venture Capital Investment Stages (Click the image to see the big version)

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 my first online presentation (beta version) about the basic venture capital method valuation and I show how we can reach the new shares equation quickly. 

Please, take this survey after the presentation! Your opinion is very important!

Shrinking Canada VC market

The Canada’s Venture Capital & Private Equity Association released a report yesterday (May 12th) that the venture capital market continues to fall in the first quarter of 2009, continuing the shrinking trend from 2008.

In the Canadian landscape, only $ 275 million was invested, down from 25% from the $367 million from the first quarter of 2008. Also, the number of deals shrink from 136 to 102 (Q1 09′/Q1 08′) and the average value per deal is $2.7 million.

The US venture capital market raised $US 4.3 billion in Q1 2009, however Canada’s market only raised $ 149 million.

This is a great signal that something should change in the Canadian venture capital market. 

Read the CVCA’s report here: http://www.cvca.ca/files/News/CVCA_Q1_2009_VC_Release_FINAL.pdf

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

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.

However, the performance rate is extremely low compared to the discount rate used by venture capitalists during a startup valuation. Why there is such a high discount rate?

There are basically five main reasons for a high discount rate:

Base Rate Return

In any investment, investor asks at least the risk-free investment rate. Currently, investors use the American Treasury Bonds rate as the base rate return because they believe the US government will pay them. Also, the government interest-rate is enough to compensate inflation and give a little bit more return. Any institution, company and individual have to give interest or return above the risk-free US Treasury bond’s rate.

Risk Premium

The return above the risk-free US Treasury bond is the risk premium. If the investors perceive that a company or individual has high risk o default, they will demand a “risk premium” for the perceived risk.

Liquidity Premium

In private companies, such as startups, it is very hard for investors to buy or sell private companies’ stocks. The main reason is the lack of information about the company performance. Because of this, less people are willing to invest. The little demand for company’s stocks means that venture capitalist cannot quit their investment at their will. The lack of opportunity of quitting an investment is compensated with a liquidity premium.

 Compensation for Venture Capital Expertise

Venture Capitalists are active investors. This means that VCs will shape the management and the strategy of the company. Also, VCs will spend their time helping entrepreneurs to give advice, to hire key people and even to bring some customers to the company. This support requires an extra discount rate.

Cash Flow Adjustment

 Given the way venture capitalist do valuation, VCs believes that the startups should provide higher return than the market rate.

 This graph shows the main factors for the venture capitalists’ discount rate:

Main Reasons For a High Discount Rate From VC (Made by ChimKan.com)

As you can see, the discount rate decreases over time (late investment rounds). In the next post, I will explain why it decreases.

National Venture Capital Association (NVCA) reported that venture capital performance showed positive returns across all investment horizons 3 years and longer for the period ending December 31, 2008.

As you can see in the table, venture returns across all horizons outperformed public market indices, NASDAQ and the S&P 500, through December 31, 2008.

Venture Capital Funds Return Are Still High Compared to NASDAQ or S&P 500

You can read more from NVCA website:

http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=424&Itemid=93

Second Market A new way out for VC and PE

Today, I just read an interesting article about a possible new exit event that venture capitalists, startups employees and other investors could do. 

SecondMarket is a marketplace where people can sell and buy “illiquid assets”. Illiquid assets are anything that people cannot easily for money. In our case, we are referring shares that entrepreneurs  issue to investors (VCs, Angels investors, employees, management, etc.)

It looks there is a new possible way for VC and other investors to quit their investment in places such as SecondMarket. 

The VC could sell his stocks from a startup to other investors, instead of relying in IPOs or acquisitions.

You can read more this interesting article about this: With Private Trades, Venture Capital Seeks a New Way Out

http://www.secondmarket.com/

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%

Cores Rurais from Flickr

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.

Ned Hill, DFJ Mercury Managing Director

Launch Silicon Valley 2009 Website

When:  Tuesday, June 9, 2009

Where: Microsoft Campus in Mountain View, CA

It is an event to showcase the latest startups from the information technology, mobility, security, digital media, next generation internet, life sciences and clean energy industries.

Entrepreneurs who are interested should send an Executive Summary of no more than 2 pages to Launchsv@svase.org by latest May 8, 2009.

You can read more about the event here: http://launchsiliconvalley.org/index.htm

TheStartup - European startups and entrepreneurs

TheStartup is a blog about European startups and entrepreneurs, it is a quite new website and it looks promising.

Some of the highlights in the website:

European Founders Capital, a 20m fund for european tech startups

yellowBird creates the first 360° immersive video

theStartup Weekend Reading #1

Upcoming European Startup Conferences and Events

Facebook is hiring in Europe

Visit: http://www.thestartup.eu

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