Probably 1/3 of my investments have started as convertible notes. Most of them did not have a cap on the conversion price. Most had 8% interest 20% discount and no warrants. Some have converted to equity and none of those felt bad.
I guess the better the companies are, the higher the valuation will be, and the more likely you are to feel bad. So maybe I'm just not a good enough investor to feel bad. I don't claim to be a professional investor. But mine didn't feel bad.
That is the main objection of investors who don't like to do convertible notes. That between the time when they invest and the time when the note converts the company will increase in value significantly and they won't get enough credit for investing early.
In early stage companies, I think a convertible note can many times be preferrable to an angel investor who is not a a professional investor and may not know the right way to price an early stage deal.
Pricing a deal is not just about getting the lowest valuation possible. You want to set the company up for success and if the cap table is overweight and the company needs more funds than expected it's going to be a painful adjustment.
If it's really early, it's hard to know the right way to value a company. Most of the companies I invest in don't have any significant revenue yet. Rather than pick something arbitrary, sometimes it makes sense to delay until everyone learns more before setting a valuation.
If you're a professional investor, it's your job to be able to figure out early stage valutaions. You have more time than I do and more resources available in order to figure that out. I understand why you might insist on a priced round. But don't hate me because I invest in convertible notes!
Forecast - Their location-based app for telling friends where you will be keeps getting better and better and so does their traction. I find myself using this app more and more. Meet Rene Pinnell @RJPinnell or Eric Katerman @geometrid. (I'm an investor through CF 2010)
Greenling - They are making us all healthier by delivering organic and local food straight to our doorsteps. They just expanded to Dallas and practically doubled their revenue overnight. This model is ready to scale. Meet Mason Arnold @masonarnold. (I'm on the Board of Directors)
Mass Relevance - They are powering most of the social media at SXSW and on most of the broadcast TV shows you see. Check out their SXSW real-time feed. Meet Sam Decker @SamDecker or Brian Dainton @bdainton. (I'm an investor)
Onespot - They recently re-invented themselves and the new model is HOT. They have more friendly, more effective way of using display ads to drive traffic. Meet Matt Cohen @zencohen or Ian Clarke @sanity. (I'm an investor)
Outbox - They have an ambitious goal - to kill the postal service and digitize everything. Team comes from Facebook and HBS and they have attracted the best investors in the world (including me!). Meet Evan Baehr @evanbaehr.
OwnLocal - They are actually making money off newspapers. I swear! Meet Lloyd Armbrust @lloydarmbrust. (I'm an investor, also Y Combinator)
RecycleMatch - They pivoted from a marketplace to an enteprise software play and have a big pipeline with the biggest companies in the world. Meet Brooke Farrell @brookebf. (I'm an investor through CF 2010)
Socialware - They make social media work for financial services. Nuff said. Meet Chad Bockius @bockius.
Sparefoot - They guys killed it when they went through Capital Factory and they have killed it every day since then. I can see how this might be a billion dollar opportunity. Sparefoot makes self-storage sexy. Meet Chuck Gordon and Mario Feghali @MarioFeghali. (I'm an investor through CF 2009)
StormPulse - Hurricane season is coming in a few months and StormPulse is batting down the hatches and getting the servers ready for the cyclical surge of traffic. Weather is not a fad, it's a long term trend that affects almost every business on the planet more and more. Meet Matt Wensing @mattwensing and Brad Wiemerslage @wiemersl. (I'm an investor)
Volunteerspot - This mega-viral site is growing like a weed with no marketing spend and extremely high user engagement. Meanwhile, they are amassing an audience of affluent, active Moms with kids that has the attention of big brands. Meet Karen Bantuveris @VSpotMom. (I'm an investor)
Then there is Indeed.com - So under the radar. So awesome. Not sure if you could still call them a startup. Meet Rony Kahan.
And not quite startups, you should also check out our latest IPO success stories - HomeAway (AWAY) and Bazaarvoice (BV).
I'm sorry to anyone I left out... there are so many other great Austin startups and I'm writing this at 1am after my first day of SXSW. I love all Austin startups!
What are your favorite Austin startups? Tell me on Twitter @JoshuaBaer
AngelList is an online community that matches startups with investors to streamline the fundraising process.
I’ve personally raised $1 million from AngelList for my startup, and have helped dozens of other startups raise $3 million more. I’ve referred more than 20 startups to AngelList, vouched for a dozen other investors and am ranked as one of the top connectors on the site.
Try a similar strategy by adhering to the following steps...
While I don't think that Austin wants to become Silicon Valley any more than Texas wants to become California, I think that we can learn from Silicon Valley to continue attracting great innovators and entrepreneurs to Austin.
Steve Blank commented that one of the most important aspects of Silicon Valley that differentiates it from the rest of the world is that failure is a badge of experience, not a badge of shame. Austin needs to be a safe environment for entrepreneurs to try out new ideas, to experiment, and to fail.
Part of that is attitude and culture, but a big part is access to early stage capital and collaborative working spaces where entrepreneurs can meet each other, incubate ideas and inspire each other. We are very fortunate to have spaces such as Conjunctured, Cospace and Tech Ranch and communities like Bootstrap Austin. Still, we would benefit from a larger, central community meeting space and coworking facility. We need the Startup District that John Erik Metcalfe and Ceasar Torres started promoting a few years ago.
Capital Factory is one piece of the puzzle. We provide a small amount of capital and lots of mentorship to 5 select startups each year. More than half of the 15 companies in our portfolio are from outside of Austin and come here to participate in our summer program. Half of those stayed here after the program ended because they find the environment so friendly to entrepreneurs. We need to expand the number of companies so that we can have a bigger impact.
One obvious way reach more entrepreneurs is through the University of Texas. Inspired by the success of Capital Factory and the encouragement of Dr. Bruce Porter in the UT Computer Science department, I'll be joining with John Butler and Bob Metcalfe to teach and undergraduate entrepreneurship class at UT called 1 Semester Startup. I hope that through this class we can identify promising young entrepreneurs at UT, accelerate them down the path of success and keep them here in Austin.
Communities like Angel List are helping Austin by connecting our entrepreneurs with early stage investors from Silicon Valley and around the world. There are more than 100 Austin startups listed and more than 300 investors "watching" the Austin market (most of them NOT from Austin).
First time entrepreneurs need inspiration from successful entrepreneurs. They need role models to look up to and get advice from. Bazaarvoice, HomeAway, Spiceworks and Rackspace are all helping to fill this void. Let's not forget the massive Trilogy Alumni network that are driving many of the top companies in Austin right now. We need more visible leaders in the entrepreneurship community like Andrew Busey, Brett Hurt, Jack McDonald, Kip McClanahan, Bryan Menell, Bob Metcalfe and John Price.
I actually think most of the right things are happening. I've been here for more than 10 years and Austin has only become more attractive to startups and entrepreneurs. We are one of the top cities in the world attracting young smart entrepreneurs, college grads, and young professionals.
We are attracting startups like Gowalla and others that are moving to Austin from elsewhere in Texas and around the country. Austin is a great place to launch a startup because it is a market full of early adopters. I am contacted at least once a month by a startup who is looking for advice about moving here.
What do we need to do? We need to keep Austin attractive to young, smart people and innovative startups. We need to continue growing the early stage venture community and our connections to outside capital. We need to identify our Startup District (East side?) and achieve critical mass. We need to embrace failure. We need to keep being Austin.
What do you think we should be doing to promote entrepreneurship and startups in Austin? Leave a comment below.
I recently started curating the Austin Startup Digest, a weekly email list of the upcoming startup events in town. I assemble everything I can find, but I need your help making sure that its got all of the best events listed.
I often see startup pitches that contain slides on competitive advantages. I rarely see startups with any real, significant competitive advantages and when I do I get very excited.
Here are a bunch of (not) competitive advantages I've seen:
we're enthusiastic!
we have having passion!
we are going to work harder than everyone else
we're built in the cloud (I put this one in an OtherInbox deck once)
we're students so we know the student market (replace "student" with anything)
we're going to charge less money (I hear this so often)
it's going to be just like XXX but we're going to let people do YYY
we're very, very excited!
None of these are real competitive advantages. You're better off just saying that you don't have any significant competitive advantages at this time and focus on why that's not as important in your situation or how you plan on acquiring competitive advantages.
Most startups don't have any significant competitive advantages (besides being a startup). You don't have to have a competitive advantage to succeed. But competitive advantages reduce risk and that's why investors are trained to look for them.
What are some real competitive advantages?
Network effects (once you get there)
Intellectual property
First mover advantage (debatable)
Relationships
Rare expertise
Does a competitive advantage matter more at some times than at other times?
Competitive advantages are rare. They can be very significant. They are the kind of thing that makes the other guys say to each other, "Shit, that's not fair!"
I think that there are times when competitive advantages matter more than others. If you are entering a mature, crowded marketplace then having a competitive advantage is more important to me. If you are creating a completely new space or if all of the competitors are small and insignificant then a competitive advantage is still desirable but can be offset by other benefits. If you're in a niche that no one else is paying attention to then there may not be any competition to worry about anyway.
If you're a startup entering a mature market, you're fighting uphill to begin with. The existing competitors have more resources, existing customer relationships, and probably know the market better than you. If you don't have some secret weapon it's going to be hard to make any progress or get any attention.
If you're creating something completely new or in a market that is immature and doesn't have any entrenched competition, the playing field is fairly even. Chances are no one has a competitive advantage.
If you're niche is so small that there is no competition at all, then competitive advantages don't really matter (at least not right now).
Competitive advantages are always good. I don't want to downplay them or say that they aren't important. But I'm tired of hearing about fake competitive advantages. If you don't have any, just say it.
I first met InfoChimps when they applied to be part of Capital Factory 2009. They were selected as a Finalist but just missed the cut for the 5 companies that we invested in. I really like the three founders and the vision and have kept in touch with them and help out in any way that I can.
Recently, InfoChimps presented at the DEMO event and I spent some time helping to improve their pitch. We recorded a few of the pitches along the way and I think this is a useful example of going from good to great. There was one meeting in person but the rest happened virtually so it is easy to follow along by just watching the videos and reading our emails and comments in order. The comments are just copy-and-paste from the YouTube video comments for ease of reading.
If I had to pull out a few key points to summarize it would be:
The goal is different with a 90 second pitch versus a 10 minute vs. a 30 minute pitch
Always start by describing the PROBLEM
With a short pitch, its more important to clearly communicate the problem than your solution. If they care about the problem, they will follow up to ask more about your solution
Tell a story about how someone uses your solution to solve the problem, don't describe your features
Only try to get across 2 or 3 key points in a short pitch. Repeat them multiple times.
Practice your pitch 100 times before you give. Keep count. Record 1 in 10 and watch it.
Close by making a point, not by saying "I'm done or thank you". This is your big chance to leave a lasting impression and its probably the most important sentence in your pitch.
Here is the play by play...
From Joseph Kelly:
We are good. Sorry we missed Demo Day last week, we were just too busy. We have made some great strides on the website and will be showing it off as an Alpha Pitch company at DEMO next week. We will also be announcing the few vendors we have signed up to sell data, including Zogby the polling firm.
From Joshua Baer:
Do you want help preparing for DEMO? I've done a lot of pitching... I'm at TC50 right now seeing tons of pitches. I'm back in Austin on Friday and could get together that afternoon or over the weekend if you want.
Session 1 - in my office
From Joshua Baer:
The first thing I suggested to them was to plan on practicing the pitch at least 100 times before they gave it. With only a few days to go, that meant 30 times a day. I asked them to keep count and to record themselves occasionally so that they could review it and so that they could share it with me privately over YouTube.
We talked about what their goal was with the 90 second pitch. We agreed that the main point was to get people excited about InfoChimps enough to talk to them in person or visit their website to learn more. In 90 seconds you can't describe everything you do - your main focus should be on describing what a big problem it is. If people care about that problem, they will be interested in finding out more about how you solve it. If they don't care about the problem, they probably won't care about how you solve it no matter how cool it is.
From Joshua Baer:
After hearing the pitch, the focus of my feedback was on simplifying the message. Say less. Give fewer examples. Take out all of the distracting name dropping of people and company names. With 90 seconds, you can only get across two or three key concepts. Things go in one ear and out the other so you need to repeat the messages multiple times in order to get them to stick.
Feedback I end giving almost every entrepreneur the first time I see them present is:
Tell a story, don't describe your features
Close by making your point with a strong sentence they can remember.
Session 2 - in the airport
From Joshua Baer:
You're talking slower but you still need to slow down even more. And that was still over the time. Even if they won't cut you off at 90 seconds its rude and unprofessional to go over. You should try hard to end right on time.
Instead of the first example that talks about the iraq researcher and how she uses InfoChimps, give that same example but describe what she would have to do WITHOUT InfoChimps. Describing the problem is more powerful than describing your solution.
If you want to think in terms of time allocated, you should probably be spending at least 30 seconds of your 90 seconds talking about the problem (not about how you solve it, just describing the problem).
Make sure you have a strong closing! It should be one sentence and you need to say it with passion!
From Bryan Menell:
If you have time in those 90 seconds, include your success to date: "We're already the largest data set provider on the Yahoo blah blah thing" it only takes one sentence, and makes be believe you have some traction already. You can also add "with additional capital, we can do even more" or whatever that part needs to be.
Session 3 - in the hotel
From Joshua Baer:
Nice! The pace is right - you've slowed it down and you're taking some nice pauses. Don't forget that when you're up on stage and nervous!
Great job starting with the problem. The example, and the story that follows are awesome!
Shorter is better than longer! Finishing early is IMPRESSIVE!
This really sounds fantastic. GREAT JOB guys! You're going to kill it tomorrow!
From Bryan Menell:
I agree! Great pace makes you sound relaxed and confident. We hear the problem, your solution, you're already getting traction in the market, so come learn more. Love it.
To reiterate what Josh says, when people are nervous they tend to talk faster, so be aware of your pacing. Keep the pace you have here, it's excellent.
The most exciting thing I heard was about how a family could use your site to figure out the area for their next home. I like Josh's idea of here's what it would take without InfoChimps.
Definitely close with "the site is live right now, and you can learn more at booth X"
post another when you refine it again, and memorize that pitch! You'll do great!
The Real Deal - DEMO
I must admit that was very impressed with the final result. Dhruv obviously practiced it over and over and was receptive to the feedback we gave him. And here is Dhruv's 90 seconds of fame at DEMO
Bonus Material
Here are the comments from Dhruv's mom.
From Meera Bansal: Dhruv, I hope to goodness that none of these are the actual pitches. They all sucked.
1.The bathroom one was spontaneous and well spoken but are you selling yourself or Infochimps?? Totally unprofessional. 2. Stop looking at your teleprompter. Memorize the lines please! 3. Very amateurish.I would not invest in your company.
The sum of all three: The content is good The examples help. The delivery has to be worked on and be absolutely professional. You are all big boys now playing & competing with other big boys. So go work on it some more. Call after the actual pitch is done. All the best. Love, Mom
And just in case you're curious, here is InfoChimp's original video application for Capital Factory 2009 and Dhruv's now infamous "shower pitch".
I need your help to get the word out to entrepreneurs about a program that may help them.
I am a mentor and investor in Capital Factory, a new seed capital and mentorship program in Austin. We're choosing 3 startups to spend 10 weeks here to build their company. They receive $20k in cash, $20k in free stuff, and 20 successful mentors as investors. The 10 weeks end in August with a Demo Day to potential investors. It's the mentor's job to ensure they head in the right direction, and introduce them to potential customers and investors.
This is an unbeatable opportunity for a technology-based entrepreneur to get an accelerated start, especially in tough times. The reason I'm emailing you is the deadline of April 3 to apply is fast approaching. I want any entrepreneur in your network to have the opportunity to consider this program.
Could you take a few minutes to forward this to your network? Or introduce me to someone who may be interested?
If you're on Twitter or Facebook, please update your status with:
RT @CapitalFactory get $20k in cash, $20k in free stuff, and 20 mentors to help launch your startup http://capitalfactory.com (please RT)
I appreciate your help. Think of it as rebuilding our economy one startup at a time!
Some really smart people have commented publicly about the US and global economic crisis at hand and what that means for startups. Jason Calacanis was one of the first, followed by Fred Wilson and Ron Conway (my good friend Ian Clarke has jokingly referred to me as the Ron Conway of Austin because I'm an early stage investor in so many different Austin companies). As I've been fundraising for OtherInbox, I've talked with many other entrepreneurs, advisors and investors and wanted to share a summary of what i've been hearing and how its affecting my direction at OtherInbox. Each comes at it from slightly different perspectives.
Jason, an entrepreneur, takes a very introspective view of how he wants to respond to adversity and who he wants to be as a person. He says the three main causes of startup failure are poor execution, a poor idea or external factors (in this case the market) and advises startups to focus on execution and make the most of the down time by being lean and acquiring good talent.
Fred Wilson, a venture capitalist, explains the view of a well-funded company with cash reserves of its own and experienced investors with deep pockets to draw on in tight times. He points out that companies who are not profitable or growing could have trouble, but that companies that are doing well shouldn't have trouble because VC's have deep pockets and will invest more capital to help weather the storm.
Ron Conway, a prolific angel investor, looked from the perspective of entrepreneurs about to take the plunge and raise angel money. He cautioned them not to quit their day jobs until they have secured funding for at least one full year of operating capital.
Ajay Agarwall, a venture capitalist from Bain Capital Ventures and friend from when we both worked at Trilogy software, pointed out that the typical Series A investment takes 7 years to mature and that 7 years from now is probably the right timeframe for the economy to recovered and growing. Consequently, he thinks that the next year will be a great time for smart venture capitalists to make early stage investments. He cautioned that later stage companies that are not profitable and have a shorter time horizon are going to have a tougher time raising capital over the next few years.
My first company, SKYLIST, saw incredible growth during the last recession. I started it in 1996, but we really started to boom in 2000 as the dotcom bubble deflated. True, it was the first time when I was focused on it full time, and not going to college or working at Trilogy. But I think the reason for the growth was that we were riding the rising tide of online marketing and email marketing in particular.
Even though the overall economy was down, some forms of online marketing grew. Marketing budgets were scrutinized and cut. Broadband Internet became pervasive and online marketing boomed because the audience was finally there and it was more measurable than traditional advertising. Budgets shifted from offline to online. Even though the total budgets were shrinking, the total amounts allocated to online were growing.
One way to be successful in a down market is to find these niches that may be growing as a result of shifting budgets and priorities. With currency, when the value of the dollar goes down, the value of gold goes up. Where is the gold in the market now? What opportunities have been created as a result of the credit crunch?
As I've been fundraising for OtherInbox, the current market conditions have certainly affected my goals and risk profile. I'm inclined to raise more a little more money and make sure that I give myself a longer runway. I'm searching for ways to generate revenue sooner than originally planned to cut my burn rate.
This is where bootstrapping will shine. All things considered, I'm kind of wishing I was bootstrapping a startup right now and am looking for every way to make OtherInbox more like a bootstrapped company. Bootstrapped companies are lean and efficient. Bootstrapped companies delay every cost as long as possible. Bootstrapped companies are resourceful. But most importantly, bootstrapped companies are forced to focus on the Right Thing at the Right Time because there is no alternative.
Last week at TechCrunch50, the interview with Peter Thiel was the one hour I was looking forward to the most - and it did not disappoint. I must admit, Mark Cuban was very entertaining - but Peter Thiel was the most insightful.
One quote that I think entrepreneurs and investors would find particularly interesting was focused on CEO pay:
The lower the CEO salary, the more likely it is to succeed.
The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.
In practice we have found that if you only ask one question, ask that.
When I was starting OtherInbox and trying to figure out what to pay myself, I asked around to other entrepreneurs and VC's and got the answer $150k-200k - with the median around $180k. That just didn't feel right to me. I ended up settling on a lower so I'number that was about half what I was being paid as Datran Media's CTO. Enough to cover my cost of living m not worried about paying my mortgage, but nothing extra.
Want to know how much your startup will be worth in 3 years? YouNoodle.com will tell you. Based primarily on information about the founders and investors, YouNoodle tries to predict the valuation of startups after 3 years.
I filled it out for OtherInbox, and YouNoodle says we'll be worth $73 million after 3 years. Like with most projections, it's probably not that accurate (I'm sure we'll be worth much more than that!) but it's still an interesting exercise.
First Round Capital released a cool new tool for entrepreneurs and investors called FundingSleuth.com. It lets you enter in companies to watch and automatically sends an email alert if that company files a sale of securities with the SEC.
If you work for a funded company, you should sign up and watch your employer. If you are an entrepreneur, you should watch your own company so that you know when your fundraising becomes public information. If you're an investor, you should watch your portfolio so that you know about other fundraising. If you're just really interested in a particular startup, you might want to monitor their fundraising.
This BusinessWeek video clip points out that there were only 5 venture-backed IPO's in the first quarter of 2008 and ZERO venture-backed IPO's in the second quarter. The VC's blame Sarbanes-Oxley, picky entrepreneurs and globalization as the cause and suggest that we make a concerted effort to save venture capital by raising awareness and easing some expensive accounting requirements.
Jason, an entrepreneur, takes a very introspective view of how he wants to respond to adversity and who he wants to be as a person. He says the three main causes of startup failure are poor execution, a poor idea or external factors (in this case the market) and advises startups to focus on execution and make the most of the down time by being lean and acquiring good talent.
Fred Wilson, a venture capitalist, explains the view of a well-funded company with cash reserves of its own and experienced investors with deep pockets to draw on in tight times. He points out that companies who are not profitable or growing could have trouble, but that companies that are doing well shouldn't have trouble because VC's have deep pockets and will invest more capital to help weather the storm.
Ron Conway, a prolific angel investor, looked from the perspective of entrepreneurs about to take the plunge and raise angel money. He cautioned them not to quit their day jobs until they have secured funding for at least one full year of operating capital. 
Last week at TechCrunch50, the 
Recent Comments