Yesterday, I was in the Startup Camp 6 Montreal and it was an amazing experience to meet with highly motivated people in the Montreal’s community. It makes entrepreneurship to be highly contagious!

I met with Peter from DailyDinner.tv and I was delighted to hear about his entrepreneurial story. He did not have any previous experience in programming, video editing nor starting up a business, but he is an example of a true entrepreneur who is self-reliant and self-learner that can exceed anyone’s expectation.

I checked his website about recipes for dinners and I am impressed by the quality of the recipes, videos, structure of the website and one interface innovation. Don’t be fool to judge the simple design of the website. The site is useful, loads quickly and that’s what a user wants nowadays.

Serving calculator

I visited other recipes and they do have similar features, but they are slow and confusing. Here, you just have to check for the appropriate amount and the AJAX magic updates the page without having to reload the whole pages (other websites reloads the whole page and it’s a hassle).

The website has hundreds of recipes and the only thing that I wish was that the organization of the recipes could be better. Maybe a directory of the recipes would help in this case.

I met with Alain Lavoie and Nicolas Gosseline and they have this great Twitter Search idea of using relevant data from Twitter to display relevant profiles for the subject you are looking for. Differently from other searches, it uses more “sticky” data such as the time length of the tweets to promote relevant profiles that you may like.

I did three searches: venture capital, video game and startups. My main three beloved keywords!

Here is the visual (very interesting) results.

I’ve just found a bit strange that when I typed startups, instead of showing profiles of people for that subject, it came back the profile of @startups which is quite unexpected.

I think they must promote their website and grow as fast as they can because there are a lot of similar (but different) products in the market. Youtube, Facebook apps, iPhone, iPad and BB are the path for growth!

I met with Barry Pâquet and I was very impressed and amazed by his story of how he started up his company. He was working as a consultant for another software company and eventually, he had a great opportunity to come up with a product that was superior from the one his client was using. Then, from that one sales, he built his portfolio of clients and making money.

I always like to listen to how people become entrepreneurs and in my experience, most people became entrepreneurs serendipitously.

His company, Quantum Whisper, offers a nifty solution for product development teams scrambling around coding and user feedback. I used to funnel users feedback to the product team and I knew how messy things can get. From the product team perspective, the challenge is to link the user feedback to the specific code or feature in a solid way. Most of us just uses a kind of spreadsheet or paper to take notes between the bug and the code related to it. However, if the project gets too big, the paper or spreadsheet solution can become very overwhelming.

The solution he has is  a platform that links users feedback directly into the development side, so no programmer nor product manager has to do the dirty work of linking those two things every time. This is a great value proposition and I bet it is going to grow a lot.

The Startup Camp 6 in Montreal was a great event and I could see some very promising entrepreneurs and startups. The scene in Montreal is hot currently and it was a great experience to mingle in the community.

My first blog post about what happened in the event will be about Habit Shaper. I met with Adriano Ferrari and he shared to me about his software that helps people to “shape” their habits. Later, I went to his website, downloaded his software and used it a little bit.

Overall experience: I think the product has potential, however  by being a installation based software in the era of web 2.0 may be disadvantageous. Many people will not be willing to install softwares in their computer, because most of the softwares are web based. I think Adriano is planning to have a web version of his software and I suggested him to have iPad version of it. It would be awesome.

The program offers you two main habit trackers. You can track to create a new habit or track those habits that you want to quit (such as smoking). The interface is pretty intuitive, however, I found a bit quirky in the creation of the habit itself as you can see in the screen shot.

In my testing, I was creating a habit of creating blog posting everyday. The whole process was easy but I wonder if I will be able to keep my blog updated that many times, lately I’m having a very erratic schedule (I’m going to Skopje, Macedonia on Saturday)!

I like the dashboard which shows you the progress. It’s colorful.

I think if Habit Shaper has an iPad version, it would rock.

MaRS CIBC Entrepreneurship Upstart Competition 10K
This event is held in the MaRS Centre in Toronto and will feature a lot of new entrepreneurs showing their latest ideas.

Startup Camp Montreal 6
I think this event will show me how the startup scene is in Montreal. It will be my first exposure to see how the entrepreneurs in Montreal are doing. I will update about the event after.

Skopje, Macedonia
This is the most excited event of all. I will be doing volunteer work in a country that I have very little information and experience about. Differently from all other countries where I have been before, I cannot speak the local language and it is a thrill for me. In my past trips, I always could speak the local language and I normally do not face communication problems. I’m excited for the experience.

http://vimeo.com/channels/ent101

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

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

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

This is very helpful for my New Venture Project timeline.

Quick summary:

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

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

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.

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

Quick summary of the post:

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

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.

InterClick is a company that provides traditional approach of supply chain methodology into optimization of ROI over advertising spending. I’m writing this post because I’m so impress that the market has so much appetite for advertising systems and tools and ad networks.

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

Zynga

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

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

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

This is a special blog post dedicated to Brazil’s venture capital firms.

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?

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

From A VC

via The HR Acquisition.

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

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

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

———————————————————–

Hello Chim Kan,

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

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

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

Thanks again for sharing.

All the Best,

Kamel
@stribe

——————————————————————————–

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/

This is another great post from Startable about pitching tips for venture capital meetings. Healy organized and shared all posts in one single place for easy access. I will remember to read this for my New Venture Project final meeting.

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.

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

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!.

It is hard to make money on the Internet. Currently, there are two famous ways to monetize on the Internet: advertising and e-commerce. In the advertising side, we have Google AdWords, Yahoo Marketing or Microsoft Advertising. These companies make money by having big audience that attracts advertisers’ money. For instance, Google gets money when users click ads. In the e-commerce side, we have eBay, Amazon, Newegg, etc. They gain profit from buying low and selling high price. They have strong brands and first-mover advantage. It is almost impossible to create a company to compete against these behemoths.

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.

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.

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

MIT Open Course Ware

Managing Innovation and Entrepreneurship

Managing Innovation: Emerging Trends

Managing Innovation: Emerging Trends

Early Stage Capital

Early Stage Capital

Designing and Leading the Entrepreneurial Organization

Designing and Leading the Entrepreneurial Organization

Law for the Entrepreneur and Manager

Law for the Entrepreneur and Manager

Entrepreneurial Marketing

Entrepreneurial Marketing

Entrepreneurial Finance

Entrepreneurial Finance

Listening to the Customer

Listening to the Customer

Pricing

Pricing

The Nuts and Bolts of Business Plans

The Nuts and Bolts of Business Plans

Technology Strategy

Technology Strategy

G-Lab: Global Entrepreneurship Lab

G-Lab: Global Entrepreneurship Lab

Share and Enjoy:

]]> http://www.chimkan.com/2009/10/21/resources-to-support-entrepreneurs/feed/ 0 http://www.chimkan.com/2009/09/02/tie-young-entrepreneurs-business-plan-competition-2010/ http://www.chimkan.com/2009/09/02/tie-young-entrepreneurs-business-plan-competition-2010/#comments Wed, 02 Sep 2009 18:17:12 +0000 Chim http://www.chimkan.com/?p=624

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.

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.

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

10 million of entrepreneurs in Brazil

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

There are some interesting data.

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

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

Early-Stage Entrepreneurial Activity Rates by Gender, 2008

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

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

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

Ex Post Facto - Entrepreneurs in the US

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

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

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

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

-          Low opportunity cost for entrepreneurs.

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

-          A lot of stories of very successful entrepreneurs.

-          Great universities and culture for innovation.

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

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

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

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

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

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

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

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

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

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

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.

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!

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

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

Kauffman says The US VC industry must shrink

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

This is incredible.

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

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

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

Technical Data Corporation: Business Plan

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

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

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

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

1. Should Parker enter the business?

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

2. Would you invest in this deal?

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

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

The deal is structured in this way:

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

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

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

15.431 Entrepreneurial Finance

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

It addresses some of the important questions such as:

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

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

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

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

There is a very interesting article about this question: http://bits.blogs.nytimes.com/2009/05/14/do-web-entrepreneurs-still-need-venture-capitalists/

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.

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

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

Angels investors

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

News related to Angels investments

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

Seed stage

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

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

News related to Seed investments

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

Startup or Early Stage

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

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

News related to Startup investments 

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

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

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

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

News related to Series A investments 

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

Second stage or Round/Series 2/B

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

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

News related to Series  B investments 

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

Third stage or Round/Series 3/C

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

News related to Series  C investments 

Australia snares Silicon Valley wireless start-up

Mezzanine or Bridge or Expansion or Later stage

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

Initial Public Offering (IPO)

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

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

This can be represented here:

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

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

A little bit more of explanation

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

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

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

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

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

In my last post about “Venture Capital Funds Return Still High“, you read that in general the venture capital funds are performing better then public companies indexes.

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.

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%

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.

Facebook valuation again...

Some highlights:

Facebook chief executive Mark Zuckerberg just had a board-level conversation about possibly accepting money at a $4 billion valuation, but decided against doing so…

Also, the company has more than $200 million in the bank, which is enough to cover its costs for up to two years…

 TechCrunch says it hears Facebook also received investment offers from two private equity firms that value the company at $2 billion. However, Facebook internally is valuing itself at $4 billion. And if Zuckerberg rejected the $4 billion offer, he’s certainly not going to be interested in a $2 billion offer…

Read more at : 

http://venturebeat.com/2009/04/15/facebook-rejects-funding-at-4-billion-valuation-may-not-raise-more

So, it seems that the $15 billion valuation was certainly overrated.

Another news:

…one potential investor submitted a term sheet for a valuation in the neighborhood of $2 billion.

What we’ve heard: Facebook stock trades privately at between a $2 billion and $3 billion valuation. That’s consistent with the numbers that everybody else is tossing around. And we’ve known for a while that when the ConnectU vs. Facebook legal spat was settled, Facebook valued itself around $3.7 billion.

What’s new this time around is that reports indicate Zuckerberg is extremely adamant about rejecting investment cash at a valuation he considers too low. When Facebook took a $240 million stake from Microsoft in November 2007, the investment was at a $15 billion valuation. Since then, it’s become clear that it was a preferred-stock deal and that Facebook’s true valuation has never been that high. But from what it sounds like, Zuckerberg would like it to get up there.

It was long before the massive Microsoft stake, after all, that Yahoo offered to buy the social network for $1 billion.

Read more at:

http://news.cnet.com/8301-13577_3-10220845-36.html?part=rss&subj=news&tag=2547-1_3-0-20

Load Impact - check how well you website can handle heavy workload @ http://loadimpact.com/

Seedcamp – check an entrepreneur event where you can meet with a lot of interestign people with interesting ideas @ http://seedcamp.com/

Chocolate Cookies – I made some cookies today with this recipe @ http://www.joyofbaking.com/ChocolateCookies.html

A Run - an Ivey student blog about his preparation for the MBA @ http://totalenthu.blogspot.com/

Ivey Entrepreneurship – Ivey’s blog about entrepreneurship in Canada and elsewhere @ http://iveyentrepreneur.blogspot.com/

Job seekers guide for venture capital – Rotman Business School’s listing about interesting information for those who are going to become VC someday @ http://www.rotman.utoronto.ca/bic/CCC/targetVenture.htm

Introduction to Financial Accounting – Online course (UC Berkeley Extension) @ http://www.unex.berkeley.edu/cat/course328.html

Introduction to Managerial Accounting - Online course (UC Berkeley Extension) @ http://www.unex.berkeley.edu/cat/course542.html

Essentials of Business - Online course (UC Berkeley Extension) @ http://www.unex.berkeley.edu/cat/course330.html

Business Writing Review - Online course (UC Berkeley Extension) @ http://www.unex.berkeley.edu/cat/course91.html

Business Valuation - Online course (UC Berkeley Extension) @ http://www.unex.berkeley.edu/cat/course123.html

General Psychology - Online course (UC Berkeley Extension) @ http://www.unex.berkeley.edu/cat/course1467.html

Introduction to Writing Fiction - Online course (UC Berkeley Extension) @ http://www.unex.berkeley.edu/cat/course180.html

Introduction to Capital Budgeting - Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8561

Essentials of Business Plan Writing (Online) - Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8526

Elements of Corporate Finance (Online) - Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8370

Introduction to Mergers and Acquisitions (Online) - Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8375

Fundamentals of Business Administration and Management (Online) - Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8639

Planning for Success - Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8549

Fundamentals of Business Strategy - Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8547

Introduction to Boards -  Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8560

Entrepreneurial Marketing -  Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8559

Introduction to Venture Capital -  Online course (UCLA Extension) @ https://www.uclaextension.edu/r/Course.aspx?reg=U8373

Valuation: the money that you have

Remember from our last post. 

- Carlos told us that his company has 5,000,000 shares outstanding.

Leonardo wants 30% of return rate instead of 50%.

Let X be the number of shares purchased by the VC.

Let’s figure out the TOTAL number of shares once Leonardo invested.

 X / (5,000,000 shares + X) = VC’s share which is 24.7% of the company

A quick explanation: after the VC invested in the company, we will have the 5,000,000 shares and the VC’s shares of the company which we call it TOTAL now. Leonardo needs to have 24.7% of the TOTAL.

X = 0.247(TOTAL)  ,  TOTAL means 5,000,000 shares + X

X = 0.247(5,000,000 shares + X)

X  = 1,235,000 + 0.247X

X – 0.247X = 1,235,000

0.753X =  1,235,000

X = 1,640,106 shares

Leonardo needs to have 1,640,106 shares of the company. Actually, the company issues 1,640,106 new shares to get the $ 2 M.

Now, how should we calculate the price per share?

We need to assume that the shares do not gives dividends and we have a conversion of common stock of 1:1.

$ 2,000,000 / 1,640,106 shares = $ 1.22/ share

If Leonardo agrees with everything else, he will state in his contract that he will pay $1.22/share for 1,640,106 shares of the company. Carlos will issue 1,640,106 shares to have $ 2M.

Imagine that this deal was done and everyone is happy, how Carlos can brag how much his company was value at?

Carlos has 5,000,000 shares, just because he succeed in selling his new shares at $ 1.22, so his shares value at 5,000,000 X $ 1.22 = $ 6,100,000 - This is what we called pre-money valuation.

OK, this is much better the valuation with 50% of rate of return from Leonardo! Remember that the pre-money was only $ 1,950,000!!!

What is the value of the company after all of this calculations?

This is what we call it post-money valuation. 

We add simply the pre-money valuation and the VC’s investment: $ 6,100,000 + $ 2,000,000 = $ 8,100,000

As you can see, the rate of return is extremely important for valuation purpose. The new value is double the amount of the last valuation.

This is one of the reason Finance skill is so important.

In the next posts, I will use some real world news and apply this Venture Capital method to see some “hidden” information.

A small Article from Mark Davis from CFJ Gotham Ventures was explaining the needs to protect the investors money by adjusting the risk of a venture with the amount of equity needed to compensate the risk.

There is one exercise from the Harvard Busienss School case that shows the basics of how a startup is evaluated by a VC. (The name of the case is “Venture Capital Method – Valuation Problem Set”. There is the exercise and there is another file which is the solutions sheet).

Given that I can’t show the content of the PDF because of copyright issue. I am going to give a similar problem and how a VC can calculate how much equity he should take of a startup.

——————————– Chim’s example —————————–

Carlos, CEO of Fiction Co., needs to raise $ 2 million for his company. He projects that the net income will be $ 2 million in five years. He also knows that similar companies traded at a price earning ratio of 15X.

On the other hand, Leonardo, VC of BlueGreen Capital, wants to have a rate of return ranging from 30% to 50%. He wonders how many shares he needs for that rate of return.

** Solution **

We have:

- $ 2 million from Leonardo

- Value of the company in 5 years (this is an important assumption, the valuation of a company can very a lot according to the market situation):    2 M X 15 = $ 30 million

If Leonardo wants a return of 50% then:

$ 2 M (1.5)^5 = $15.18 M  >>> 50.6% of the company (of $ 30 M value of Carlos’ company)

Basic explanation of this calculation: 2 million is the money that Leornado is going to give to the company. The 1.5 is the rate of return of 50%. For example, if you give me 100 dollars with a expected return of 50% in one year, I will need to give you back 150 dollars back at the end of next year.

Now imagine, that this happens five times (five years), so we multiply 1.5 by 1.5 by 1.5 by 1.5 by 1.5. Easy job to calculate.

The result is basically the amount of money that the VC is expecting to get in five years from now.

If we know the expected value of the company in five years, then we will know what is the percentange of the company a VC needs to have today.

Now let’s see what is the percentage for a 30% of return.

$ 2 M (1.3)^5 = $ 7.42 M >>> 24.7% of the company (of $ 30 M value of Carlos’company in five years)

There is another issue for Leonardo. He knows what is the percentage he needs to have in the company, but he doesn’t know how many shares he needs to have.

For that we need to know the number of shares that the company currently has.

Carlos told us that his company has 5,000,000 shares outstanding.

Let’s see how many shares Leonardo needs to have with 50% of return rate.

Let X be the number of shares purchased by the VC.

Let’s figure out the TOTAL number of shares once Leonardo invested.

X / (5,000,000 shares + X) = VC’s share which is 50.6% of the company

A quick explanation: after the VC invested in the company, we will have the 5,000,000 shares and the VC’s shares of the company which we call it TOTAL now. Leonardo needs to have 50.6% of the TOTAL.

X = 0.506(TOTAL)  ,  TOTAL means 5,000,000 shares + X

X = 0.506(5,000,000 shares + X)

X  = 2,530,000 + 0.506X

X – 0.506X = 2,530,000

0.494X = 2,530,000

X = 5,121,457 shares

Leonardo needs to have 5,121,457 shares of the company. Actually, the company issues 5,121,457 new shares to get the $ 2 M.

Now, how should we calculate the price per share?

We need to assume that the shares do not gives dividends and we have a conversion of common stock of 1:1.

$ 2,000,000 / 5,121,457 shares = $ 0.39/ share

If Leonardo agrees with everything else, he will state in his contract that he will pay $0.39/share for 5,121,457 shares of the company. Carlos will issue 5,121,457 shares to have $ 2M.

Imagine that this deal was done and everyone is happy, how Carlos can brag how much his company was value at?

Carlos has 5,000,000 shares, just because he succeed in selling his new shares at $ 0.39, so his shares value at 5,000,000 X $ 0.39 = $ 1,950,000 - This is what we called pre-money valuation.

OK, it is not that much, but if he just had incorporated the company with $1000, he is actually getting a value of $ 1,949,000!

What is the value of the company after all of this calculations?

This is what we call it post-money valuation.

We add simply the pre-money valuation and the VC’s investment: $ 1,950,000 + $ 2,000,000 = $ 3,950,000

Fantastic! This is one of many ways a VC can value the company.

I challenge you: if Leonardo wants a rate of return of 30% instead of 50%, what is the amount of shares Carlos will need to issue and what is the price per share ? What are the pre-money and post-money valuations?

In the next post, I will give you the answer.

Kiva is a non-profit that allows you to lend as little as $25 to a specific low-income entrepreneur in the developing world.

You choose who to lend to – whether a baker in Afghanistan, a goat herder in Uganda, a farmer in Peru, a restaurateur in Cambodia, or a tailor in Iraq – and as they repay their loan, you get your money back. It’s a powerful and sustainable way to empower someone right now to lift themselves out of poverty.

In my case, I chose 8 entrepreneurs from 6 different countries!

Moreover, you can share to whom you invest.

http://www.kiva.org/lender/chim

Last but not least, they have a great page explaing what microfinance is.

http://www.kiva.org/about/microfinance/

Viva microfinance!

I cannot believe that I achieved my objective of going to the Endeavor’s dinner. It was a great experience. People are very interesting. Entrepreneurs, volunteers and Endeavor’s people, each, have a very unique story to share. Moreover, people in the dinner are believers that entrepreneurship can help us to move our world to a better place.

If each of us could just do our best, the world would be better.

Endeavor presented the results of their achievements during the year 2008. I was impressed that they got an equivalent donation of media exposition of 23 Million of reais. While their budget is just 3.7 Million.

Also, they do get their new round of fund in each of these event and people do make business or share interesting info.

It was also a great experience to learn to to behave in these events. Also, how to navigate through different kind of people.

Some random info:

- The dinner started at 7PM and I just got out at 2h30AM!
- I guess all the volunteers were praised (including me!)
- The party after the dinner was awesome.