How Venture Capitalists Think

This post from Joi Ito explains the process one firm uses in sourcing, evaluating, investing in and exiting venture capital investments. Among the many nuggets of useful information:

“Valuation is based in part on the risk involved in the business. There are clear milestones that decrease the risk in any business. Risk usually decreases as each milestone is hit. A typical series of milestones might be: team on board, competitive analysis and due diligence of business plan done, technology developed and prototype shipped, first customer signed, cash flow break-even, evidence of geometric grown in revenues and a scalable business, buyer/IPO in sight.

From the perspective of the entrepreneur, it’s better to take the minimum amount of money necessary and raise money as risk starts to decrease since the entrepreneur can demand a higher valuation and be diluted less. The problem is, raising money takes time and energy away from the business so you want to minimize the number of times you have to raise money.”

The Entrepreneur’s Library

TheEntrepreneur’s Library [from Cayenne Consulting] is a directory of over 600 resources created to help you build, grow, and run your venture. Some of the topics covered include:

Getting Started
General Resources, Legal Structure,
Directors & Advisors
Planning & Research
Business Plan, Competitive Analysis,
Market Research Tools, Market Research Firms, General Research
Funding Your Business
Getting Ready, Funding Mechanics & Deal Structure, Venture Capital, Business Loans, Angels, Grants, Public Markets
Running Your Business
Marketing & PR, Financial Management, Human Resources, Ethics, Management & Culture, Insurance, Real Estate, Tax, SOHO
Legal Resources & Issues, Intellectual Property, Legal Structure News & Views
General Business, Tech Business

Death Knell for Traditional Software Licensing?

“Nicholas Carr writes about the death of the traditional software licensing model and views of software as a service. Quoting from Christopher Koch:

‘It’s unreasonable to expect vendors to discount up front and then cut maintenance fees on the back end – they have to get their money somehow. Customers bombard them with requests for new features and functions they say they want in the next version. There has to be some kind of ongoing payment arrangement to keep that cycle going. But the lack of transparency has killed the model. Customers don’t know how much money the vendors are really making and when.

When you’re paying for software endlessly without knowing whether you can afford to upgrade the software when a new version comes out, or how much you will be charged for new software that the vendor develops, or how much of a say you will have in that development, you are tempted to simply reject the entire model out of hand. I think we’re there. When CIOs say they don’t trust the model even if they get the software practically for free up front, then something is clearly wrong here.'”

For pertinent links, please see this post from robhyndman.com from which the foregoing was reprinted.

The Process of Forming a Company

“John Nesheim, in his best-selling book High Tech Start Up: The Complete Handbook for Creating Successful New High Tech Companies, concludes from his research that there are 14 stages in taking a venture from idea to IPO, as follows:

Stage 1: Getting the Idea
Stage 2: Meeting Around the Kitchen Table
Stage 3: Getting the Founders’ Commitments
Stage 4: Pullout from Employer
Stage 5: Creating the Business Plan
Stage 6: Filling the Management Team
Stage 7: Raising Seed Capital
Stage 8: Incorporating and Cash in the Bank
Stage 9: Finding a Home
Stage 10: Starting Up
Stage 11: Raising Secondary Rounds of Capital
Stage 12: Launching the First Product
Stage 13: Raising Working Capital
Stage 14: Initial Public Offering

Chapter 3 of High Tech Start Up, reprinted in this startupventuretoolbox.com article, describes the main focus activity, time required, typical participants, help needed, major costs, main risks, output and ROI for each of these stages. Although written for a hi-tech company, this discussion is also generally applicable to most other new ventures.”

Small Business Articles from Microsoft

Topics covered in this series of small business articles from Microsoft include:

“Technology

Technology continues to change the way small businesses operate. Find the latest information and advice on everything from speeding up your broadband connection to selling online to using intranets and extranets.

Marketing

Look here for sales and marketing advice to grow your customer base. You’ll find articles on market research, online marketing, customer service and acquisition, advertising and branding, holiday marketing, and privacy and spam.

Management

Managing a small business means managing relationships with customers and employees. Look here for advice on customer relations, employee relations, recruiting and staffing, pay and benefits, and leadership and training.

Finance

Expert advice on small business finance issues including getting financing, budgeting, reducing your taxes, travel planning, legal and other expenses, business insurance, and automating your business with finance software.

Startups

Starting a business is an education in itself. Look here for advice such as how to write a business plan, where to seek financing, business entities to consider and business names to avoid. You’ll also find tips for successful home-based businesses.”

PatentScope Portal Launched by WIPO

The World Intellectual Property Organization (WIPO) has recently launched PatentScope, a new web portal for all patent-related information and services concerning the international patent filing system (Patent Cooperation Treaty (PCT) System).

Existing information on PCT filing, electronic filing and other patent-related resources is available through this new portal. In addition, new sections have been introduced on patent data, statistics and current issues. The patent data section provides access, through a PCT Online File Inspection System, to the complete collection of published international patent applications filed under the PCT system (now more than a million) from 1978 to the present day.

Being Who You Are — Living Your Truth

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Originally uploaded by TigerTigerTiger.

“When we are young children, we live authentically, seldom afraid or embarrassed to seek out what we want or to speak our minds. As we grow older, we tend to tuck that authenticity away, putting it aside while we chase our dreams, afraid that it might hinder us in our success. But we never let that freedom go completely. We may conform to society while embracing secret passions when alone. We may withhold certain opinions, though it doesn’t change the fact that we possess them.

It is important, however, to never stray too far from that youthful brashness and self-interest for they are qualities that help make you who you are. The authentic you is your true self and, in living authentically, you live your truth, making time for the things you love and projecting who you really are. The simplest way to live your truth is to leave the expectations of other behind and live the way you feel most worthwhile.

It takes being selfish in a healthy way by doing what you know is best for you, regardless of the opinions of others – even the opinions of close friends and family. Living authentically means that you make choices without fear, trusting in your soul’s wisdom…

If you value personal pursuits, don’t feel forced into a certain job just to make enough money to keep up with your neighbors. Conversely, if you prize success in business, don’t let others’ perception of what’s right for you hold you back. Denying your unique truth can lead to feelings of failure and dissatisfaction because you aren’t acknowledging your true self. In living your truth, there are no pretenses. Everything you do will reflect who you truly are.

If you are unsure of who the authentic you really is, look inward and ask yourself what your purpose, values, and needs are. Honor your strengths and don’t let yourself be guided by what other expect of you. Finally, discover your passions by trying new things, and sticking with those things that stir your soul. Finding who you really are and then making the choice to embrace you true dreams and desires will take your life in a direction that is both satisfying and deeply meaningful.”

From the DailyOM.

Venture Capital Financing Issues Explained

This excellent and comprehensive article [from White & Lee, LLP] provides a detailed overview of the process and issues that arise in venture capital financings – typically for technology-based emerging growth companies. For more on this topic from the venture capitalist point of view, see this great series of articles from Brad Feld.

The principle issues discussed in the White & Lee article include the following:

1. Creation of the Securities.
2. Liquidation Preference.
3. Dividend Rights
4. Redemption Rights.
5. Conversion Rights.
6. Antidilution Protection.
7. Investor Protective Rights
8. Board Seats
9. Representations and Warranties
10. Registration Rights
11. Preemptive Rights of First Refusal
12. Co-Sale Rights.

Some of the many highlights in the article include:

“It is the rare company that can fund its needs internally… Companies that are able to operate without outside sources of capital typically choose this path so as (a) not to give up management control and equity share to the investors, (b) control the rate of growth of the company, (c) focus on goals other than making money (though pursuing personal goals and making money are not necessarily mutually exclusive), and (d) delay or avoid altogether a liquidity event such as an IPO, merger or acquisition. Further, the companies that can fund operations internally typically have low capital requirements – and fully established services or product lines within a short period of formation. Most companies, however, must fund operations in private financings until they mature…

Private companies are almost always valued on the present value of future cash flows during a growth/maturity period of from 3 to 5 years. Venture investors typically apply one of several forms of discounted cash flow analysis to formulate a range of acceptable company valuations. These valuations rest on investor assumptions on product introduction, market growth, earnings and capital market multipliers that will applied to earnings. Management should have its own analysis of these factors, and discuss these considerations with the investors in order that both sides may feel comfortable with the value that has been established. Once company value is set, the investors’ equity participation is easily determined as the ratio of the aggregate investment to the accepted value of the Company…”

The paper concludes:

“The resolution of the issues described in this paper depends almost entirely on the attractiveness of the Company to the investment community. Concessions on the terms of investment will not cause the investment to be made if the Company is not sound – as evidenced by its business plans, its identification and approach to the market – and other factors considered in the valuation of the Company. Once the Company has generated serious investor interest, then these issues become important…Ultimately, all parties must be satisfied with the terms of the investment in order to avoid future misunderstandings.”

Top Ten Tech Trends

From this post from Steve Rubel comes his list of 10 trends to keep an eye on in the next 10 years. He cites:

1. The Long Tail
2. The Read Write Web/Web 2.0
3. Timeshifting
4. Collaborative Categorization
5. Citizen Marketing
6. The Daily Me
7. It’s All a Conversation
8. What’s Inside is Outside
9. Trust Marketing
10. Decentralized Communication

Via this post from Between Lawyers

Forbes Best of the Web Small Business Blogs

I cross post many items from this blog to The Startup Law Blog that I maintain at the Allbusiness.com Small Business Blog Center.

I am pleased to report that Forbes.com selected the blog center as one of its Best of the Web blogs covering Small Business.

I am particularly gratified that the Forbes.com review singled out my posts for special mention.