It is not uncommon in the Boston area to find a group of entrepreneurs and VC’s discussing business plans, investing options and term sheets. However, it is little uncommon to find a similar group huddled in a conference room from 8am to 7pm on a Saturday having similar discussions with a sole aim of “helping the entrepreneurs” refine the business plan and get VC’s (not the ones participating) excited about investing in their entrepreneurial dream. However, this is what happened on June 21st in Waltham as members of the Startup Leadership Program participated in an Entrepreneurship boot camp.
WHAT IT TAKES TO BE AN ENTREPRENEUR
The day started with Srinivasarao Nandiwada “NSR”, co-founder of M-Qube and Mobegic, Inc. discussing “What it takes to be an entrepreneur?”. NSR said that there is no right time to start a company (‘Start it today”) and there is no right educational background or work experience needed to start a company. All that is needed is passion, focus, confidence and high tolerance for risk and failure. Bellow is “NSR’s advice”:
* Don’t start a company if you can not trust others
* You should be good at selling
* Build good contacts – contacts are crucial as they generate references
* Chose your advisors wisely – Everyone wants to be your advisor
* Don't let small things deviate you from the important things.
* Learn to say NO– No VC or Angel is making an investment as much as you are making
* Know what you are giving up
1. Control of ownership
2. Voting rights
* VC’s look for the following
1.Team
2.Market Need – Your solution
3.Scalability of business
4.Market Risk
5.Competition
6.Exit Strategy
7.Intellectual Property
8.Commitment
FINANCIAL MODELING
The next session focused on “Financial Modeling” and the speaker was Anupendra Sharma, Partner at Siemens Venture Partners. Anupendra discussed what VC’s look for when an entrepreneur creates financial statements (Balance Sheet, Cash Flow Statement, Income Statement). He started by saying, “You might have the majority ownership but VC’s have the veto right, and end of the day you work for the VC’s” and this got everyone’s attention. Below is Anupendra’s advice on creating financial statements:
* Essentials in financial statements to know (should be on CEO’s finger tips)
1.Cost to acquire a customer
2.Revenue expected from each sales rep.
3.Benchmarked G&A and Sales & Marketing cost as % of the Revenue
* 4.Burn rate and cash on hand
5.Capital Ex. Requirement
6.Cash flow for the business (days receivables versus days payable)
7.Breakeven analysis
* General tips
1.VC’s care about cash on cash return
2.Going to a VC when the fund is in its last stages is not good – usually VC’s will go for Series C funding in last stages of their fund – go for a new fund if looking for Series A
3.Typical VC fund: $300 M and typical average investment size: $20M
4.Do the due diligence on the partner (talking to the right partner is crucial)
5.Check out thefunded.com for reviews on VC’s
A FUNDABLE BUSINESS PLAN
Roger Walton, General Partner, Castile Ventures, followed Anupendra and discussed the elements of a fundable business plan. He started by saying that “VC’s are in the business of minimizing risk” and hence between market risk and team risk, VC’s would usually take only one and not both the risks. So, if the market risk is high, it is better to get seasoned team (even if it means you not being the CEO). Below is Roger’s advice:
* Get referral – cold calls do not work well when contacting VC’s
* VC’s on an average look at 1000 business plans a year and end up making 5-6 investments: That is 0.5-0.6% acceptance rate, which means it is easier to get into Harvard Business School than getting funded, so make sure you leave no stone unturned
* If the potential value of enterprise is less than $50M, VC’s won’t be interested. You should also have tangible back able assets (e.g. Proven Team, IP, Business Model) to increase the chances of getting funded
* “VC’s invest in judgment about market and people and not in business models”
Good to have an advisor to bounce off ideas (make sure primary motivation of the advisor is to help)
* While looking for a VC – talk with fellow entrepreneurs, ensure VC is compatible with focus, stage and investment size
* Key elements of a pitch: Market (size, growth, competition), Team (Existing, “Holes”), Technology (Not just What but Why), Funding Needs and Usage
* If market is highly unknown, make sure the team is “leak proof”
LEGAL ASPECTS OF STARTING A COMPANY
The next session was a deep dive into legal aspects of starting a company. Gene Landy and Amy Mastrobattista of Ruberto Israel & Weiner, P.C. and Robert Adelson of Engel & Schultz, LLP discussed the basics of term sheet and negotiating a deal. It was a very informative session and the group learnt the legal nitty gritty of starting a company. Following were the key takeaways from the session:
* Components of term sheet (Price per share, dividends, conversion, liquidation preference, redemption, anti-dilution protection, pre-emptive rights)
* Management control aspect of investment (voting rights, rights of first refusal and co-sale, board of directors seat, veto rights/protective provisions, information and inspection rights)
* Most VC’s would rive a hard bargain to force down the valuation as far as possible
The goal of the most investors is to end up owning at least a 20-30% ownership interest in the company after a first round investment. Upto 40% is not unusual
* Types of securities (Common stock, preferred stock, Convertible debt, Warrants, Dividends)
* Others terms to watch for and pay close attention to while negotiating the term sheet:
Liquidation preference (Participating vs. Non-Participating)
Conversion feature
Anti-dilution protection
Redemption rights
Voting rights
Board seats
Pre-emptive rights
Right of first refusal
C-sale rights
Drag along rights
Registration rights
* What is worth fighting for: Valuation, Redemption Rights, Liquidation preference and multiples, Anti-dilution protection
What is not worth fighting for: Rights of first refusal and Co-sale rights, registration rights, dividends
ONE MINUTE PITCHES
1-minute pitches by 12 members of the group followed the legal session. The judges were Vinit Nijhawan, Entrepreneur and former president of TiE Boston, Al Kapoor, President of Millennium Ventures and current president of TiE Boston and Dr. Pravin Chaturvedi, life sciences entrepreneur and CEO of IndUS Pharmaceuticals.
The judges brought their experience and background to bear while judging the 1-minute pitches. Vinit looked for business model, execution and presentation style; Al, focused on market opportunity (anything less than a billion dollar market lost his interest) and revenue model while Pravin looked for business feasibility and focused on the individual and the team. Together they were a terrific panel of judges who provided very useful feedback. We joked later that it was like an American Idol.
The event was won by Rajit Kamal with an insurance company that has lower premiums because care is provided overseas (in India).
The business ideas ranged from social networking, IT outsourcing, health care prevention and treatment, book publishing to stock market brokerage firm. Following is the summary of what we heard from the judges:
* Presentation style: This is critical as one has only 1 minute to make an impression. One of them said “Got to like the person before liking the business plan, opportunity etc.”. So, allow your personality to come out and focus on “delivery”
* Market size: Should be a hook to grab the attention. Anything less than a $1 B would not excite many VC’s
* Team: Mention something about yourself and the team. Remember VC’s invest in the people and not the idea and hence giving a sneak preview of the team is crucial
* Business Model: It should be clear how the business would work and generate revenue
* Name-dropping: If you have clients or big name advisors/team members, mention it. It gets the attention
* Ask: Be clear of what you are asking and don’t be shy to ask what you want
LESSONS FROM THE TRENCHES
The 1-minute session was followed by an engaging talk by Dr. Pravin Chaturvedi on “Lessons from the trenches”. Dr. Chaturvedi comes across as a very affable person and his personality came out during his talk. He emphasized on the value of “recruiting and retaining a great team” as crucial to success of an entrepreneurial venture. Some his words of wisdom were:
* Entrepreneurship is an irrational act. You can never rationalize it and hence there is no point rationalizing it when deciding to start a company. You can never explain why would anyone leave a stable job, forgo income, go through stress, spend hours away from family with absolutely no guarantee of success. Just do it. He called entrepreneurship “Irrational Obsessive Compulsive Disorder”
* Entrepreneurs build value while managers build career. Anyone who plans his or her next steps in terms of “What would it do for my career” is not an entrepreneur. The right question is “How can I add value or make an impact”
* Humility goes a long way in entrepreneurship. Have the arrogance on your technology and strategy but humility on personal skills. Knowing you weakness helps pick the right team
* People management is one of the most important traits to succeed. “You are not hiring people, people are joining you”. So, respect people and make them feel good about themselves. At the end of the day “No one works for money, people work for “ideas” and “intellectual challenge”
* Entrepreneurs are open minded and not critical of people. Don’t be judgmental and trust people
* Play to your strengths and have a healthy self-image to know your weakness
1-minute pitch was a competition but regardless of the winner the real winner was the spirit of the participants and engagement of the judges.
INVESTOR PITCHES
The workshop ended with four investor pitches judged by the same panel of judges. The business plans covered IT outsourcing, test preparation, book selling/author to offline solutions for online customers. The feedback was similar to 1-minute pitches in terms of presentation style, team, market opportunity, revenue model etc. Two additional comments were:
* VC’s look for three things
1.People
2.Market
3.Technology
VC’s usually lead with one. So, pick the one that is your strength and make sure it is highlighted in the pitch
* There are three aspects of presentation
1.Content
2.Packaging
3.Delivery
A presentation that makes the most impact is the one that has the right packaging and delivery. So packaging and delivery is most important to get the foot in the door while content becomes important as VC’s start their due diligence.
Hooman Hodjat of iRelai won the investor pitch.
GROUP DINNER
The day ended with a group dinner in downtown Waltham. It was time to reflect back on the year in the program, celebrate the friendships formed and wish everyone success in their entrepreneurial and life journey.
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