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Posts Tagged ‘raising money’

The purpose of this Phenotype element is to determine what if any debt the business may have at the time of the financing, and more importantly if that debt will be serviced immediately upon closure of the round. What one isn’t looking to do is to fund a company only to have all the cash go out the door to service old debt, leaving the company with no cash to operate. Ideally there is no debt, or debt that converts to equity at the time of the financing. If there is debt after the financing, the terms should be examined to determine what impact it will have on cash flow. There should also be provisions that give the current investors some protections in the event of a wind up. In addition, keep an eye out for and examine any investment banking agreements that may impact the cash position upon closure of the round.

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The definition of debt here is broad and includes trade financing, outstanding credit (even personal credit card balances if known), informal borrowing from friends and family, bank lending, private loans, convertible securities or other forms of debt, formal and informal.  Will such debt need to be serviced immediately upon closing this round of financing?  Are there any existing agreements (e.g. with investment bankers) that may impact cash or equity upon closure of the round, such as warrants or convertible securities? How can existing debt hamstring a new venture?

This is just one of the key criteria forward-thinking investors use when evaluating the strength of entrepreneurs and their new ventures. How do you measure up? Go to www.venturephenomeproject.com to read all 80 criteria and swap knowledge with other entrepreneurs & investors.

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needleinhaystackThe scarcity of capital for early stage companies in recent years has lead to the creation of literally thousands of businesses focused on helping entrepreneurs raise money for their start-ups. At North, this subject is close to our hearts, as we’ve made it our mission to make the entire process for fostering, filtering, and funding entrepreneurial innovation more efficient.

While some individuals and companies are taking strides to optimize entrepreneurship and inspire innovation, others unfortunately seem to be falling into the all too familiar trap of playing “follower,” when today’s economy desperately needs leaders. While there’s certainly value to extract from a few of these businesses, many unfortunately are coming up short of industry expectations, launching the exact same set of features and functionality as those that came before them.

“They have taken their cue from the Gold Rush when the truly crafty business-people made money not from prospecting but by selling shovels to the prospectors. Likewise, today’s money-raising services have found a low risk means to separate the cash-starved entrepreneur from any money he or she may have left.” – Antiventurecapital.com

In this section, we highlight a few of the emerging ideas, ventures, and individual brand names that either have or are in the midst of trying to bring much-needed efficiency to the early stage venture market. Are any the long-awaited silver bullet that is going to help accelerate economic growth when now we need to create innovation faster than ever before?

You be the judge. Let’s take a closer look at the Pitch Farms.

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We’ve already spoken at length about the recent proliferation of the “Pitch Farms,” those online destinations that promise to connect start-ups with the investor community. If you’re an entrepreneur, you’re probably very familiar with the usual suspects that offer up their virtual cork board for some type of fee (usually a recurring monthly one): FundingPost, FundingUniverse, EFactor, and GoBigNetwork to name just a few.

David Rose, Founder and CEO of Angelsoft, considered one of the “smarter” pitch farms, outlines both the opportunity and the shortcomings of these destinations when he said, “…there are many, many web sites out there which purport to connect, or ‘match’, entrepreneurs seeking funding with potential investors. By our own count, there are probably three or four dozen, and that’s without looking very hard. The reason there are so many is that it’s like shooting fish in a barrel: how many starving entrepreneurs wouldn’t want to come to a web site that promises them cash?!”

Mr. Rose originally launched Angelsoft to Angel groups software that enabled submissions, file management, and group communication tools. It was a lot of the infrastructure that traditional Angels needed to scale and to update their current submission processes and makes them more “new economy ready.” However, Angelsoft has since morphed into another massive deal farm for the start-up community. Perhaps pleasing their engineers on staff, they now offer up a dizzying array of features and software updates. So many in fact, it makes an average Angel investor feel as though they’re playing around on their kid’s Facebook page.

angelsoftscreenshotEven with the questionable, confusing, and clearly off-target features, it’s not hard to tell that Mr. Rose has his sights on consolidating the entire early stage venture market. With 442 Angel groups, over 14,000 investors, and a staggering 2,000 new venture applications per month, they now have an Open Deal pitch for $250 a pop that allows an entrepreneur to get their plan in front of all 14,000 investors with the click of a mouse (if those investors were actually logged on and could even find their way to the Open Deal room…).

“The sad reality, however, is that while it is extremely easy to get hungry entrepreneurs to list their plans, it is well-nigh IMPOSSIBLE to get investors to show up on the other side of the curtain…for the simple reason that (a) the ratio of investors to entrepreneurs is about 1:1000, and (b) investors are so deluged with opportunities that they simply don’t go out LOOKING for plans; plans come to them!” says Mr. Rose who in his own words admits he’s got an efficiency problem on his hands.

Recently Angelsoft started to actually push deals onto the unsuspecting investors of all the third party Angel groups that use their software. This pushy intrusion comes in the form of a bi-weekly unsolicited email filled with recent venture submissions. Angel groups that signed up for Angelsoft to help manage their Angel group now find themselves competing for their own investor members attention with the unrequested (and often unwanted) deal flow being shoveled onto their members by an Angelsoft email server that seems to have its dial stuck on “spam.”

“With Angelsoft, all of the personal aspects of Angel investing seem to be removed from the equation. My materials are submitted through Angelsoft forms, and then disappear into some system that encourages a group of busy angels to evaluate the opportunity in a black box. Do they like it? Do they hate it? Do they even read it? I have no idea, since I have never heard anything!” comments a disappointed entrepreneur.

For all the aggressive email action and striking numbers on this site, one has to wonder, is it really delivering on quality deal flow or just polluting the Internet with more “not ready for prime time” quantity? As of this writing, Angelsoft reports that just 1.32 percent of start-ups on their site have been funded, and that the average number of “views” for each submission is only 5.3 (Which means an average submission is viewed by only 1 of every 3,000 investors that Angelsoft claims to represent). For entrepreneurs and investors, the verdict is still out on whether this site is more “soft” than true “Angel.”

The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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Entrepreneurs are an interesting bunch. While nearly all of them have an “I can do it myself” attitude, which is crucial to get the ball moving, that same attitude usually ends up preventing the company from scaling. The truth is there are some situations where you simply can’t be the most effective person for the task. Now if you have to lean on others (something you should get comfortable with if you ever want to scale a business where you don’t work 22 hours a day), you should think about the cost/benefit relationship of doing it yourself or having someone else do it for you.

Think about it. Can you be a reference for yourself? How is an investor to trust an entrepreneur who has conducted his or her own due diligence? These are a few examples where you simply CAN’T do it yourself. In fact if you even try, it starts to have an inverse effect. Try telling an investor that you’ve done a background check on yourself and that it came back clean (and please film their response and send it to us if you can…).

Also, when you are looking at which aspects of the capital raising process you need to offload, be realistic about the time factor here. Sending an email to X number of Angel groups or VCs takes about 30 minutes each (to find the site, read about them, then apply), take that number and multiply it by X applications and we’re looking at X hours. At what point does it make sense to pay someone to do this work for you?

240 Investors X 30 minutes = 120 hours. Okay, if you do this yourself that means that you could spend 8 hours a day every working day for three straight weeks, sending (not responding to) emails. Is this a good use of your time?

For investors it’s the same problem. Reading 40 business plans a month for 30 minutes each = 20 hours of reading. Before an investor has even picked up the phone, or a golf club for that matter, they’ve already spent 4 hours a day reading highly subjective business plans.

Most Angel groups perform their own due diligence, which for most groups means handing off the task to a “casual” investor member who then has to take on the responsibility for the entire group and conduct some free form analysis of the venture. Don’t be surprised to hear that most investors arms retract approximately 4 inches into their shoulder sockets when someone is asking for a volunteer to perform due diligence. For the Angels, It’s hard to get enough to do it yourself, not to mention the threat of having to corral your investment buddies in order to perform a thorough analysis of the company, that is, assuming you can get any volunteers to help you at all. For the entrepreneur, due diligence is a distracting, time consuming effort that ultimately takes away from their focus of growing and improving their business. Outsourcing this work may be a way for both parties to get back to doing what it is they want to be doing. A standardized set of criteria for this process would also provide complete transparency, allowing both investors and entrepreneurs to be on the same page when it comes to evaluating the strengths and weaknesses of a business.

Many investors admittedly invest in the management team rather than in the idea, essentially betting on the jockey, not the horse. This makes sense, since the most other parts of a business can be easily changed. But it’s unrealistic to expect even the best management team to bring a genetically flawed plan to market with any kind of success (remember Kwame Brown?). Investors need to be clear on the whole picture; without such insight it becomes betting rather than investing. In fact, a study done by Willamette University’s Rob Wiltbank shows that Angel investing is actually riskier than people think. The study found that 61% of the Angels surveyed had returns greater than the amount they invested, which means that 39% didn’t! That’s not a surprising statistic; investors simply are not taking the necessary steps to provide themselves with all the information available to them.

act_satLooking at the world of college admissions we see a highly standardized method for measuring prospective students in the SAT and ACT tests. These tests show how you can have a straight A student from a small high school who may not score nearly as high as a B student from a top ranked private school. While the standardization of analysis would be powerful, what really matters is if the investors value the standard.


There are no analytics that tell the entrepreneur who is reading their plan, how it has been distributed, and what parts they are spending the most time on (or how much time they are spending reading it in general). This data is simple to capture and may give an entrepreneur some valuable feedback as to whether or not their plan is getting into the hands of people who can help them grow, and how they are receiving it.

Look for opportunities to transform investment review into something that is more attractive. That is to say, as an investor you have the ability to greatly influence the plan and direction of a company. Some simple suggestions or compromises may make the investment much more feasible for you and also help out the team in the long run.

The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

A good presentation with a good PowerPoint given by an individual with a strong personality can easily sway a room full of investors into cutting a check. Investors need to be sure they’re not getting charmed out of their hard earned cash and that the great presentation was great because of what was being offered. Investors need a better mechanism for filtering investments, a standardized venture “combine” if you will. There are simply too many new ventures looking for help and money, and the process for filtering these opportunities is still based on a complex network of personal relationships that will never scale to meet the market needs. As the global economy expands and moves forward, new systems and technologies need to be implemented to accelerate American innovation as well.

As we mentioned, trust is key, so an investor may make a move on a deal because it was given to him or her from a trusted individual (as a favor, for example) even though it may not be the best deal for them. Angel networks provide some buffer between enthusiastic entrepreneurs and investors, but more often than not the Angels are the ones who are doing all the screening work anyway; it’s not as if they can just show up with the confidence that all the pitches they see will be high quality opportunities.

The answer to this problem is pretty simple; look at the entire investing ecosystem and see where there are constraints. Then we need to collectively implement plans that remove those constraints. The systems and technologies are at our fingertips, it’s time we stepped up and innovated ourselves.

Entrepreneurs need to stop jumping in just upstream of a logjam and wondering why they aren’t floating downstream to paradise. Here’s a tip; paddle to shore, load your canoe onto your back, and hike around the blockage, and then put in downstream. Ignore the reams of angry entrepreneurs clamoring on and on about how the market is this or how the market is that, or go ahead and join the masses pushed up against the dam who are wondering what will happen next.

If you’re interested in learning more about how a Venture 360 due diligence engagement can make you a more effective and efficient investor or entrepreneur, please contact us by sending a short email introduction to northventure360@dontgosouth.com and we’ll set up some time to discuss how we can help you avoid the logjam.

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Did McDonalds take Starbucks seriously? Think they do now?

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A crucial undertaking of any new venture analysis is doing a thorough assessment of the Competition.  All new products are judged by consumers relative to existing products in the market. If there’s not a clear understanding of what’s already available (inside and outside of category), a business will have a heck of a time carving out a clear product position in the minds of potential customers. By reviewing competition in and outside of category, it allows one to be conscious of whom likely market entrants will be and enables one to view these other participants as either

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strategic partners or even emerging competitors. To the contrary, not all competition is bad. A rapidly growing competitor could indicate the emergence of a new category of product or service. Competitive advantages come in many forms and this Phenotype is designed to see that the business has

established some form of lead in the market. At the same time, we look to see if there are entrenched competitors or behaviors that would create limits to growth or expansion.

Have you done your homework on your competition?  Go to www.venturephenomeproject.com and share your experiences with investors and entrepreneurs.

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Many new gimmicks and stunts marketed at entrepreneurs now exist as ways to rise to the top of the sea of investment opportunities. While we have to admit there is an intoxicating rush from pitching your innovative venture in front of an audience, the end result usually feels more like a hangover. Investors leave with more questions than answers, and entrepreneurs are left wondering if their choice of wardrobe sealed the fate of their company. Whether it’s a trade show, mixer, or conference they’re usually marketed around the emotional value proposition of “meet real investors.”submityouridea

Just in case you weren’t paying attention, any investor worth his salt is already plugged in to a complex social network from which he or she plucks prospective deals. What makes you think you’ll actually find a reputable investor or advisor at one of these events? Oh, and you think that entry fee is paying only for the catering service? These events are run by businesses looking to make money. They don’t necessarily care if you close a deal while you’re there, only if your registration check clears. And this just in, handing a spiral bound PowerPoint to an investor in an elevator is about as effective as a guy throwing himself at a female bartender in a packed club on a Friday night.

You should also know by now that the Internet is full of charlatans, scam artists, spammers and a myriad of other people with questionable morals. And because there’s not a lot known about the investor process, entrepreneurs don’t really know whom to trust when they scour the web looking for funding. They’re always suspicious of something that’s offered for free (like a new online business plan farm) and are just waiting for the hidden fee to rear its ugly head. Free usually means you need to put in a credit card and spend the rest of your life trying to cancel a recurring charge for $19.99 a month. If you’re going to invest in outsourcing your capital raising work (which is not unreasonable) try to make sure that the approach is smart, that you are going to get the feedback you need to improve over time, and try to save the fantasy of a lottery ticket for the check out counter at 7-Eleven. internetscam

And lastly, if you happen to be sitting on the couch in the early am, with your computer in your lap, watching TV and one of those “We’ll Pay Money For Your Idea” infomercials comes on, you should probably view it the same way you do a fake ad on Saturday Night Live. Of course not every “invention” firm has bad intentions, but let’s just say there are a larger number of scam companies than those actually helping the entrepreneur. So do your homework and background checks. If after submitting your materials for consideration you’re having trouble making contact with a live and knowledgeable voice, it’s probably not worth your time.

Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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While the management team for the company is the one holding the steering wheel for the business, the strategic advisors can either be a GPS navigator guiding the business turn by turn or a sleeping passenger who is only along for the ride. One must determine the strength of the advisory board based upon several elements; board experience, key strategic relationships, compensation, and other crucial doors that this group of individuals can help open. It’s hard to have overwhelming faith in a board carrying the definitive responsibility for the success or failure of a business, it just doesn’t seem to work out that way in the real world. What one should look for is a strong and sensible advisory team who will represent shareholders with smart insights, impeccable integrity, and overall a strategic vision for where the company needs to go to be successful. The compensation structure of board members should also be taken into consideration, as well as the frequency of involvement. Board members should also serve as references for the management team’s experience and abilities. To truly maximize the helpfulness of strategic advisors, both the entrepreneur and the board should be focused, respectful of each other’s time, and share a similar passion for results.

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How Does Your Advisory Board Measure Up?

When looking at a new venture the Advisory board is certainly a point of interest from an investor’s perspective. Are there advisors for the venture? If so, are they well-connected, and have a personal interest in the venture’s success? How important are advisors to the success of a business? Before one fills up a business plan with high-profile names that look good on paper, they should make sure those advisors bring value in the flesh by functioning as proactive contributors around a conference table.

How does your advisory board  measure up? Go to www.venturephenomeproject.com to read all 80 criteria and swap knowledge with other entrepreneurs & investors.

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