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June 05, 2009
June 04, 2009
Bottom's Up!
If you’re
planning to enter a business-plan competition, most judges are looking for you
to really demonstrate and understanding of your businesses, which of course can
come from actually getting it started. Here are the top six elements they look
for:
- A clear upfront explanation of exactly what the product does and who benefits from it. If
you can’t tell me what you do in one slide with a couple bullet points, you’re in trouble. Everything else
you tell me up to the point where you say what you do, I will forget.
- A clear definition of a need
and value in the market. Do customers really
want what you’re planning to sell. Do they need a better mousetrap, or do they already have something
that is good enough? Why have you
chosen to offer this particular product or service—simply because you know
how to do it, or because consumers really want it? Finally, why do they
want it from you? Do customers
already see greater value in what you have to offer versus your
competitors?
- Evidence of direct contact with customers and suppliers. How many potential
consumers have you talked with—10? 50? 100? It’s a continuing frustration to
encounter students from the best B-schools who haven’t bothered to reach
out to anyone in the marketplace to gather intelligence from the people
who will actually use the offering or to identify the cost of selling the
product. Not only will this kind of
contact help produce a better business plan, but it will help create a
better product or service by incorporating features most important to the
potential buyer.
- Do you have a real customer or some in the pipeline? If you already have people you’ve sold
to— or at least people you’ve talked to about the product and its price—it
demonstrates you’ve done your work on building your business, and your
odds of succeeding go up.
- A bottoms-up approach to sizing the
opportunity. Have you figured out
what customers are willing to pay and how many customers are available? Just Googling the marketplace and
looking for analysts estimates is not sufficient research. You must talk to people to determine a
price point, the urgency of the need and the breadth of the market. Multiply the number of potential
customers by the price, and you come up with the true addressable
market. You should also build 12-month
financials with this bottoms-up strategy. How many people will it take to deliver your product to the first
five customers? The next ten? How much sales and marketing support
will you need? It also tells judges
you have a realistic understanding of how to build your business.
- What’s your funding strategy? How much do you have to accomplish before
you can raise or borrow money? Does
the product need to be ready for market or only the first phase completed?
What do you need to accomplish with the initial capital you receive to go
back in 12 months or 18 months for more?
Explore the
market, not just your mind, and you’ll have a far better likelihood of emerging
from your next competition and into the real world as a winner.
May 30, 2009
May 29, 2009
April 16, 2009
April 01, 2009
Creative Financing in Tough Times
Your bankers won't answer the phone, the venture capitalists all have alligator arms and your start-up needs cash. However, you are generating revenue and have a solid sales pipeline. What do you do? Get creative. The best advice I ever received as an entrepreneur was from one of a wise board member of mine in 2001. He told me know matter how many great opportunities you have in your sales pipeline, no matter how unique your technology is, no matter how solid your management team is, no matter how great your company is....you are out of business when you are out of cash. There is no future if your run out of cash today. Plain and simple. Unfortunately sometimes good businesses go out of business.
All is not lost. Tough times sometimes require creative solutions to financing cash flow gaps. Below is an excerpt from an email I received an astute entrepreneur who is considering implementing a creative solution to raise cash. He is running a successful SaaS software business and is business is strong enough that he probably could raise venture capital if he had to, but terms would be onerous in these times. He is doing exactly the right things to keep his business alive to fight another day when things turn around.
We have basically two revenue streams, our recurring monthly subscription fees and a setup fee when we bring on a new customer. We are not yet profitable, our cash burn is not substantial but our runway is getting tight.
I am looking at offering our customers the ability to pre-pay their monthly subscription for a year or two and providing some financing incentives for them. This would drag forward some cash but obviously reduce our monthly cash in take later on. It seems like a nice way to solve some short term cash issues, but throws the whole SaaS subscription model on its head (at least from a cash flow perspective).
My guts says it’s a good way to help finance things, but I’m wondering if it’s a rob peter-to-pay-paul scenario. Should I be more protective of the future cash flow?
I’d appreciate any thoughts you might have on this.
I am looking at offering our customers the ability to pre-pay their monthly subscription for a year or two and providing some financing incentives for them. This would drag forward some cash but obviously reduce our monthly cash in take later on. It seems like a nice way to solve some short term cash issues, but throws the whole SaaS subscription model on its head (at least from a cash flow perspective).
My guts says it’s a good way to help finance things, but I’m wondering if it’s a rob peter-to-pay-paul scenario. Should I be more protective of the future cash flow?
I’d appreciate any thoughts you might have on this.
March 12, 2009
IVCA Q&A: IllinoisVENTURES CEO, Managing Director John Banta
March 11, 2009 0:00 AM - IVCA
CHICAGO – IllinoisVENTURES is a seed- and early stage technology
investment firm focused on research-driven companies in information
technologies, the physical sciences, life sciences and clean technology.
Managing director and CEO John Banta has a wealth of experience in clean technologies, which are currently among the hottest investments for venture capitalists. The IVCA recently interviewed Banta to discuss IllinoisVENTURES, the current climate for green tech investments and the research that creates new enterprises.
IVCA: How did IllinoisVENTURES establish and distinguish itself as a seed- and early stage technology investment firm?
John Banta: We were born out of a conviction that competitive return can be achieved through investment in a portfolio domiciled in large part in Illinois and the Midwest. The impetus was a willingness on the part of the University of Illinois to attack a challenge in a creative and commercially powerful way.
We’ve developed a particular expertise in research-derived work and have developed a portfolio of industry-leading holdings in highly fundable domains. In the process, I think we’ve crafted a uniquely capital-efficient approach that has served us well in both good (and now with the rather bad) environments.
IVCA: The root of your company is in academia. What bridges the need between those academic roots and the venture capital community?
JB: Like any early stage venture investor, a significant aspect of our effort involves fostering successful co-investor relationships with leading firms that are active in our areas of technical endeavor.
Where we’ve excelled is in developing deep expertise in specific domains. When combined with our highly active approach, this allows us to act as “feet on the ground” for investors that may not have staff on the ground in the Midwest.
IVCA: In your development work with Midwest universities and federal laboratories, what type of research are you finding to be most attractive for investors?
JB: There are not a lot of new rules. As investors, we look for projects that start with a defensible advantage to allow sustained margins against scalable markets.
The trick when doing research-derived work is to focus on technology that can be made into a product in commercially relevant form and validated with real customers in a reasonable time frame. This is a requirement to achieve a competitive return. That approach tends to ring well with peers and has helped us facilitate the development of co-investor syndicates.
IVCA: Green tech has excited the investor community. What does IllinoisVENTURES focus on within the green tech realm that garners the most interest in the venture capital community?
JB: Beneath the trendy “green tech” and “clean tech” monikers are long-standing areas of work for us: industrial bioprocessing, advanced materials, device physics, etc. These happen to translate productively into applications like renewable biochemicals, water sensing, remediation and lighting.
That the venture spend has expanded so significantly in these areas is terrific, but as always, it’s critical to have a perspective on where the “puck is going to be” as it relates to current commitments while avoiding areas at risk of having become overfunded.
IVCA: How will the Barack Obama administration, which is committed to more science-friendly policies, help to expand the type of technologies IllinoisVENTURES is committed to?
JB: It’s clear that renewable energy research will continue to grow in key areas and that NIH funding will remain fairly stable. This bodes well for the continued flow of future fundable projects. Having said that, innovation would always occur even in tough environments as evidenced by Silicon Valley’s leading companies (many of which have roots in the malaise of the 1970s).
IVCA: Information technologies are a constantly evolving dynamic. What trends or areas of IT will garner the most interest in 2009 and beyond?
JB: Data. Data. Data. Over the last 10 years, the Internet went through several phases. The first phase was about commercialization and creating companies like Amazon and eBay. The second phase was about socialization through blogging, tweeting, Facebook, etc.
The next phase will be about helping make sense of all the data that is being created on the Internet through better understanding context, keywords and classification. Also, opportunities have emerged as information technology has met the power grid and has created the smart grid.
New challenges exist around monitoring, securing and protecting all the data.
IVCA: What advantages does IllinoisVENTURES have as a Midwest-based venture capital firm?
JB: We benefit from three factors. First, there were a limited number of truly early stage investors focused on research-derived investing in the Midwest. We are now among the most active.
Second, we’ve been fortunate to develop expertise in industries and technical domains that have emerged as highly fundable. This is a reflection of the nature of the vast high-quality research base in the Midwest and ashift in the venture spend. Finally, at the heart of all our projects are people. The human capital markets in many of our areas of focus are actually pretty rich in the Midwest.
Managing director and CEO John Banta has a wealth of experience in clean technologies, which are currently among the hottest investments for venture capitalists. The IVCA recently interviewed Banta to discuss IllinoisVENTURES, the current climate for green tech investments and the research that creates new enterprises.
IVCA: How did IllinoisVENTURES establish and distinguish itself as a seed- and early stage technology investment firm?
John Banta: We were born out of a conviction that competitive return can be achieved through investment in a portfolio domiciled in large part in Illinois and the Midwest. The impetus was a willingness on the part of the University of Illinois to attack a challenge in a creative and commercially powerful way.
We’ve developed a particular expertise in research-derived work and have developed a portfolio of industry-leading holdings in highly fundable domains. In the process, I think we’ve crafted a uniquely capital-efficient approach that has served us well in both good (and now with the rather bad) environments.
IVCA: The root of your company is in academia. What bridges the need between those academic roots and the venture capital community?
JB: Like any early stage venture investor, a significant aspect of our effort involves fostering successful co-investor relationships with leading firms that are active in our areas of technical endeavor.
Where we’ve excelled is in developing deep expertise in specific domains. When combined with our highly active approach, this allows us to act as “feet on the ground” for investors that may not have staff on the ground in the Midwest.
IVCA: In your development work with Midwest universities and federal laboratories, what type of research are you finding to be most attractive for investors?
JB: There are not a lot of new rules. As investors, we look for projects that start with a defensible advantage to allow sustained margins against scalable markets.
The trick when doing research-derived work is to focus on technology that can be made into a product in commercially relevant form and validated with real customers in a reasonable time frame. This is a requirement to achieve a competitive return. That approach tends to ring well with peers and has helped us facilitate the development of co-investor syndicates.
IVCA: Green tech has excited the investor community. What does IllinoisVENTURES focus on within the green tech realm that garners the most interest in the venture capital community?
JB: Beneath the trendy “green tech” and “clean tech” monikers are long-standing areas of work for us: industrial bioprocessing, advanced materials, device physics, etc. These happen to translate productively into applications like renewable biochemicals, water sensing, remediation and lighting.
That the venture spend has expanded so significantly in these areas is terrific, but as always, it’s critical to have a perspective on where the “puck is going to be” as it relates to current commitments while avoiding areas at risk of having become overfunded.
IVCA: How will the Barack Obama administration, which is committed to more science-friendly policies, help to expand the type of technologies IllinoisVENTURES is committed to?
JB: It’s clear that renewable energy research will continue to grow in key areas and that NIH funding will remain fairly stable. This bodes well for the continued flow of future fundable projects. Having said that, innovation would always occur even in tough environments as evidenced by Silicon Valley’s leading companies (many of which have roots in the malaise of the 1970s).
IVCA: Information technologies are a constantly evolving dynamic. What trends or areas of IT will garner the most interest in 2009 and beyond?
JB: Data. Data. Data. Over the last 10 years, the Internet went through several phases. The first phase was about commercialization and creating companies like Amazon and eBay. The second phase was about socialization through blogging, tweeting, Facebook, etc.
The next phase will be about helping make sense of all the data that is being created on the Internet through better understanding context, keywords and classification. Also, opportunities have emerged as information technology has met the power grid and has created the smart grid.
New challenges exist around monitoring, securing and protecting all the data.
IVCA: What advantages does IllinoisVENTURES have as a Midwest-based venture capital firm?
JB: We benefit from three factors. First, there were a limited number of truly early stage investors focused on research-derived investing in the Midwest. We are now among the most active.
Second, we’ve been fortunate to develop expertise in industries and technical domains that have emerged as highly fundable. This is a reflection of the nature of the vast high-quality research base in the Midwest and ashift in the venture spend. Finally, at the heart of all our projects are people. The human capital markets in many of our areas of focus are actually pretty rich in the Midwest.
Illinois Venture Capital Association
Posted using ShareThis
March 11, 2009
February 10, 2009
Give Buywyz a Try
We all have run into this scenario before. You're in the store, Best Buy, Dick's Sporting Goods or a wine shop, and you see a product you want to buy. You ask yourself - is this a good price, does it have a good rating, what do my friends think about his product? The new Buywyz beta enables you to get all of this information directly to your phone immediately by simply taking a picture of the product barcode, texting the product number from the barcode or calling in the product code. The applications integrates with your Facebook or Twitter account so you can immediately get feedback from friends.
Your're also probably thinking to yourself, I've heard of this before. You're right, there are popular iPhone applications and Google android applications that enable some of this functionality. The beauty of buywyz.com is that it works on any phone and you don't need to download any software.
Simple is best.
February 09, 2009
Slapped by Amazon.com
Just when I think great strides are being made to personalize marketing messages, I get a slap in the face to remind me that we still have a long way to go. It especially hurts this time because the slap came from the company that put the "e" in e-commerce. Yes, Amazon. Today, I received an email offer from them to buy the new Kindle.
The message said "As
a current Kindle owner, we'd like to offer you a special opportunity to
be among the first to experience Kindle 2. Even though we've increased
our manufacturing capacity, we want to be sure our original Kindle
owners are first in line. Order Kindle 2 by midnight PST on February
10th and you will be given priority."
One the surface, the message seems, kind and thoughtful, but what they should have recognized that I invested in 2 Kindle v1's less that 60 days ago!! So instead of thinking that this is a good offer, I'm disappointed that they didn't tell me about he new version as I was investing $700 in the now outdated version. Now, of course I know they wouldn't (nor should they) do that, but my point is that I should be the last one to get this message, not the first.
Sure, I don't live under a rock so I am aware of the exciting new, shiny Kindle 2, but Amazon doesn't need to rub it in - by saying, "hey dummy that just bought version 1, how 'bout re-up-in' " A classic example, of how some marketing manager just sent a generic marketing email to a segment of their database that was clearly too broad.
The good news is that if Amazon can't get it right, there is room for opportunity.
February 05, 2009
Obama takes a play out of VC Handbook
Obama has taken a play out of the VC handbook. Executive pay limits for company's receiving TARP funds is absolutely justified. It is standard for VCs to set cash compensation limits for executives. Incentives are provided through stock options to align interests with shareholders. Increase in equity value is makes lots of money for executives as well as shareholders. With stock prices of major banks less than a hat size, the same opportunity is available. Plenty of upside for stock options, but limit the cash compensation.
January 05, 2009
The Perfect Board Packet
Too often I receive voluminous board packets from over zealous CEO that are 50+, 100+, sometimes 200+ pages. While CEOs intend for such a deliverable to be a sign of comprehensive hard work, it actually makes our life as board members difficult. The ideal board packet is a simple PowerPoint Deck that highlights accomplishments, issues, and goals to be completed by next session. The major theme of a board deck is marking accomplishments versus promises from the last board meeting. Annual board meetings should be much more comprehensive, but your typical board meeting should include the following:
A good executive summary sets the mood for the meeting.
1. Take care of governance issues like options, approvals etc. first.
2. Summarize cash position. Highlight cash on hand, anticipated burn and cash out date.
3.
Summarize progress of the business. Have a two column slide on that
outlines what you said you would do and what you accomplished.
4. Summarize any major issues/observations encountered during the quarter
Then methodically go through with a few slides for each functional area of your business, technology, product development, partner development, marketing, sales, customer service and financials. No more than 2 slides per area highlighting agreed upon goals for the period and what you've accomplished.
5. In the technology and product sections, highlight your product
development gantt chart highlighting actual versus planned
deliverables. Be able to speak to missed dates with rationale and how
it will be corrected
6. In partner development, summarize the meat
of the deal. Are there pre-commitments or is it just a Barney deal?
What will it cost to support the deal and what do we expect to get out
of it?
7. In marketing, summarize PR placements and lead generation
activity. How well are you converting leads into qualified sales
opportunities?
8. In your sales section, walk through the pipeline
deal by deal in salesforce.com format highlighting the deals you closed
this quarter and expect to close next quarter, the quarter after that,
etc and make sure those numbers tie to the quarterly financials you
present. Your board should become very comfortable for your ability
to predict timing of closings of your deals.
9. In the financials
sections, highlight cash flow. It is really all that matters.
Bookings are great, but cash flow timing is start-ups is crucial to
understand. Even the most promising business are out of business when
they our out of cash. Investors hate bridge loan fire drills.
9.
Strategic topic. If appropriate, pull one topic out of the weeds for a
strategic discussion like product vision, next target markets etc.
Have a slide or two to spur discussion.
10. Finish with a summary slides highlight key goals before the next board meeting.
December 05, 2008
November 19, 2008
VC Model Broken?
This is a common slide floating around the web which is held up as evidence that the end is near for the venture capital industry. As a venture capitalist I should be torked. For many reasons I should be blogging that it is a bunch of c***, for reasons not least of which it came from the garbage site "The Funded" - talk about adverse selection, but don't get me started, it's not the purpose of this message. Additionally, I would say that one data point does not a trend make, however (a big however), there is some truth in the above graph.
What is not said in this chart as well is that the number of VC firms have doubled in the last 20 years; the average fund size is $170 million versus $70million 10 years ago with (and here is the kicker) roughly the same number of deals completed (2,200 in 1997 versus 2,500 in 2007). That means roughly the same number of deals are getting 2x the amount of money. Is it that much more expensive to build a start-up these days? I think not, in fact, good layout a pretty good argument that it is cheaper.
Very simply, the venture capital business is in the business of building businesses. There has been a slow fade in the industry away from this notion. It is hard for a VC to be active if they are compelled to allocate so much cash, so quickly, which is often bad. I have observed this in practice. Too much capital to a start-up so soon can be detrimental as they are forced to scale up an unproven or broken model.
Why would they do this? Often times, the incentives and motivations are not aligned between the super large VC and entrepreneur. Venture capitalists are measured on IRR which is a function of time and return. They would rather plow a bunch of cash in early to see what happens than wait until the model is ready to scale.
I'm not sure what the ideal size venture fund is, but what I can say is I believe that most of the time, smaller funds are better aligned with the incentives of the entrepreneur. For example, the vast, vast majority of software exits are less than $75 million. Smaller funds and entrepreneurs can make money on a $75 million exit and call it a success. This is not the case for many larger funds. Somethings- gotta-give and it shouldn't be returns to LPs.
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