Free, or Almost Free Money for Your Startup

As many of you know who follow me, I am a big fan of Fred Wilson of Union Square Ventures (USV) with a blog, AVC. I have been following his blog and learning a lot for over 5 years. Fred put up a great post today, where he talks about Government Grants as a financing source that you might consider. Fred points out that among the positive aspects of government grants are that they are Free Money, you don’t have to pay it back, and you don’t have to give up any of your company stock for it.

Fred also points out that there might be some drawbacks that might turn some entrepreneurs off. The application process can be time-consuming and time to approval, if you can get a grant, may take a long time. Fred points out a few other “strings” you might encounter. He specifically mentions the Small Business Innovation Research (SBIR) grants.

Fred’s not high on startups getting this type of funding. It seems a lot of his bias comes from the investment sectors that USV focuses on. There are a number of other sectors like bio-tech including medical devices, and clean-tech that need enormous amounts of capital that are hard to fit into a VC time cycle. For example, getting a new drug approved by the FDA is potentially a 10 year process and most VC funds are structured with a 10 year life span. Or, how about the tens of millions of dollars it might take to get a medical device through the FDA’s 510 (k) process. I realize that there are VC firms that invest in this segment, but this is not for the faint of heart. A VC has to believe in the investment without clearly knowing when the device will come to market (the 510 (k) process), and they won’t know exactly how much reimbursement will be allowed by the Center for Medicare and Medicaid (CMS). So, getting some early dollars from a NIH grant to help the process along can be huge for companies.

When you read Fred’s article, be sure to go through some of the comments to get some idea about the network of conversations about grants.

In the meantime, if you are in Southern California and have a product or device that you think might fit a government grant program, there is a great resource at TriTech Small Business Development Center (SBDC) with offices in Irvine and Riverside. They recently brought on a SBIR/STTR and federal grant expert to help companies understand the available programs and whether there might be a fit between a grant and the company. They are currently putting on SBIR workshops that are worthwhile attending if you might be interested or want to know more.

Being someone who likes full disclosure, I feel compelled to say that I have been mentoring high-tech startups at TriTech for a couple of years. I recently sat through a session with one of my clients who was not convinced that going after a Phase 2 grant was worthwhile. After about an hour with the new expert, he better understood the process and why he had nothing to lose in applying.

The Flipside: Friends and Family Financing, Great Move or Impending Disaster?

The Flipside, Another Way to Look at an Issue

Many entrepreneurs look to family and friends as the source of their initial financing. After all, the amount of money they need is not substantial in the greater scheme of things, they already know who you are, family members want to show they support your efforts, and you don’t have to get into sticky issues like Valuation, Use of Funds, and Exit Strategy. So, sounds pretty good eh?

NOT SO FAST, you may think of it as the easiest way to get funding, but the downsides are something you should consider a lot. There is an interesting article in the Small Business Section of the Wall Street Journal today that describes the downside of using friends and family members. If you take money from friends, you have to consider the possibility that your friendship will end or be severely affected. Or how about dreading those all too often family social events where you will run into Uncle Andy who either looks at you in a way that makes you feel like a complete failure or spends the entire evening espousing his way to better run your business.

What the article did not discuss is the idea of Smart Money versus Just Money. Rarely, do family have the backgrounds to provide the mentorship that early stage companies need. Consider first time entrepreneurs, they start with an idea they have passion for and a desire to make it happen. However, they lack experience in developing a startup, understanding of the various organizational structures so they can choose the one that fits them best, identifying and selecting the right team members, access to additional levels of funding that may be require, or the Rolodex of other people they can call to help as needed. In other words, all the areas they need to successfully execute on their plan!

If you are starting out, my suggestion for one of the first things an entrepreneur should do is to find a great mentor who is willing to work with you. A mentor is someone with considerable skills, knowledge and experience to help you through a myriad of issues including being able to identify who else you should talk with.

Anybody else have an opinion?

The Flipside: Keeping Your Idea/Technology Secret When Starting Out

The Flipside, Another Way to Look at an Issue

I run into lots of entrepreneurs who go out of their way to keep their idea or technology secret. They search me out, want to get my opinion or advice, and start out by asking for an NDA. I am not special, they act the same way with anyone they talk with. In their minds, the idea is the most important thing and they have to do whatever they can to protect it! Now I am not naive and do understand that there are secrets that are the cornerstone to a business, but every idea is not as critical the formula for Coca Cola.

So, here is the flipside to think about, there are tons of great ideas, but very few turn into successful businesses. The successes don’t always have the best idea or most innovative technology. So what do I think is the difference? The successful ones figure out how to “execute” on the idea; how to turn a great idea into a great business. To do that, you need lots of help starting with building a great team.

If you ask most investors what is more important a great idea or a great team, I don’t know one that picks the idea. It sounds cliché, but we tend to bet on Jockey’s not Horses. We see lots of great technologies, but few teams that show the wherewithall to build the business and execute on the plan they have developed.

Focus on the  skills, knowledge, and experiences you believe you need to build a successful business and then go about identifying the best talent to execute your plan and build your business. In order to get the best people, you have to show them your vision, which includes your technology. If you build the best team and business plan, all anyone can do is steal your idea, but they still have to figure out how to execute on it. At the same time, you will be off but you be off getting your products into the market and build your business.

Something to think about. Any other thoughts on this?

Pitch It! Youth Entrepreneurship Program (YEP)

Have a Great Business Idea?

The Business & Entrepreneurship Center at MiraCosta College (in Southern California) is hosting an elevator pitch contest, where college students, or anyone 27 or under, can try to convince a panel of ”Angel Investors” that they have the best business idea, all in less than 3 minutes.
  8 finalists will be chosen.
Registration Deadline is Midnight, April 22nd, 2011.
Pitch It! Youth Entrepreneurship Program (YEP)

Click here to learn more:  
http://www.yepcalifornia.com/pitch-it.html

Grand Prize is an Apple iPad2


Want to Watch? Come by and join our audience for free, plus you can vote for your favorite elevator pitch live.

Top 3 Reasons to Apply to Pitch It!

1. You’ll gain great practice in pitching to potential investors.

2. You’ll experience firsthand “Shark Tank” meets American Idol.

3. (Possibly the most fun reason) You might win an Apple iPad2

So click over to this link here and fill out your application.

Tech Stars and Do More Faster

For any of you who are not familiar with TechStars or the book that two of the founders published, I recommend that you investigate them. TechStars is a seed accelerator program that started in Boulder Colorado back in 2006 and founded by Brad Feld and David Cohen.

Brad is a Venture Capitalist and Managing Director of the Foundry, a Boulder based venture firm. He is also the author of Feld Thoughts, a popular blog where Brad covers many issues around investing are entrepreneurship. David was a Boulder based entrepreneur and Angel Investor who approached Brad with the concept that evolved into TechStars.

I did an earlier post about Do More Faster, so I won’t re-state what I covered there. I did however take one of my recommendations seriously and bought copies of the book for entrepreneurs and founders that I mentor as a holiday gift. I thought the book had a lot of great information and would benefit my clients. However, I wanted to see if they thought the same way I did.

The book is a compendium of articles written by Brad, David, TechStars participants and mentors around seven themes. Everyone read the book even those who are more consumer product focused. They all thought there was valuable content and enjoyed hearing how others dealt with problems they are currently experiencing.

Interestingly, two of them signed to participate in future programs and one of them is currently talking with the Director of the Boston TechStars about being part of the next program, which begins in a few weeks. They only select 10 companies from the 800+ applicant, so getting this far in the process is huge.

So, if you are an early stage entrepreneur, you should definitely start looking at the Startup America Program, the things coming out of the Small Business Administration in relation to Startup America, TechStars.org, and get a copy of the Do More Faster book.

Wireless Medical Devices for the Home, the Next Big Thing?

About a year ago, I started to see more and more about a new line of medical devices that utilize smart phone platforms and add software and/or a physical attachment that turns the phone into a powerful medical device. If this is hard to visualize or understand, watch the video by Eric Topol at last years TedMed conference and be prepared to be amazed. Many of the large, heavy diagnostic devices in a doctor’s office can now be carried in a brief case. In fact, multiple devices will fit and still leave plenty of room for other things a doctor might carry along.

Part of the amazing aspect of Eric’s presentation is that the devices he shows already exist! They are not prototypes that will be available sometime around 2020.

Another amazing thing is that Southern California, especially San Diego, is considered “Ground Zero” for this emerging class of technologies and products. It certainly makes sense since San Diego was “Ground Zero” in the development of the cell phone industry and quite a few Life Sciences companies began life here. Combine this with the small town atmosphere where people and businesses seem to know each other and it doesn’t take long for engineers from both areas to talk and share ideas. One result that Eric mentions is that there were 100 companies working on wireless medical products last October. In talking with a friend who is a lawyer back in DC and works with the FDA a lot, he mentioned that there were 300 patents issued in this space this year and 180 were issued to San Diego companies!

As I mentioned when I started this post, I first began looking at this area about a year ago, but decided to learn a lot more a few months ago. Any time a hot new industry begins to emerge, lots of opportunities develop for entrepreneurs, service providers, and investors especially those who take the time to follow the developments and discover the true opportunities from the rat holes that you can get caught up in that burn considerable time and dollar resources.

Over the next couple of weeks, I will put up some posts of things I have discovered and some pitfalls that you can avoid if you decide to get on this roller coaster as the industry develops. I am also interested in understanding what others have encountered as they have gotten involved in this industry and the recommendations they will share with this developing community.

So, my answer to the question I posed in the title is ABSOLUTELY, this is the next big thing and how big it gets will depend on how well the community around this industry develops. If history repeats itself, San Diego will have an active community and stay in the forefront as this industry develops.

Internet Startups – Something for Entrepreneurs to Consider

I just put this up on Startup Coast, but thought I would put it over here also,

Many times when I am listening to a pitch for a new Internet or Social Media company, the entrepreneur attempts to categorize their company as another YouTube or Facebook. Now it is entirely possible that this may be true, but it is highly unlikely. More importantly, using companies like YouTube or Facebook create an impression of the type of story we should be listening to hear.

I thought it might be interesting to look at YouTube for the type of story they were able to tell. First, they were created in February 2005 and officially launched in November of 2005. They had their first public beta in July 2006 at which point they were getting 65,000 new videos per day and by January 2009 they had about 6 Billion videos. They estimate they now upload 24 hours of video every minute of every day.

Back in 2005, their story was something radical but apparently believable to Sequoia Capital who invested $11.5M shortly after their launch in November 2005. I remember seeing Chad Hurley on stage at the June, 2006 Always On Stamford event where he was asked what his business model is and he said they hadn’t figured it out quite yet.  Google announced a $1.65B offer for the company two months later.

My point is that over a very short period of time, about 19 months, they went from creation to acquisition with a huge payoff, but clearly had some meteoric results to back up their story. They could demonstrate their growth even though they couldn’t tell you they planned to make money. Their service was up and running and delivering results!

So, if you want to make a pitch that your startup is on track to be the next YouTube, remember to show that your service is up and running and bring in the results that shows your ability to be the next YouTube. That’s what they did.

As I have said many times, investors look for reasons to say NO and positioning oneself as the next YouTube without a compelling story of exactly how this is going to happen, gets me to NO fast.

As a side, YouTube is currently the third most visited site on the Internet behind Google and Facebook and is the second most popular search engine behind their parent Google.

Entrepreneur Mistake from Not Knowing the Investor

I am constantly surprised when I see an Entrepreneur presenting to a group of investors and they make a real minor league mistake. The one I encountered recently was a company who passed out a Fact Sheet and in the Pro Forma Financial Projections indicated that the financials were available via an NDA.

The first, obvious problem is that investors don’t sign NDA’s to listen to an introductory presentation and anyone who does the slightest due diligence would uncover this. Second, since these are basically projections, they are, in fact, part of a story that the entrepreneur creates to explain their opportunity. If you tell me that you believe the financial projections are so sensitive that you will only provide them under an NDA, I assume there is something you are trying to hide. Since I am looking for a reason to say “NO” to a deal, this certainly qualifies.

You work pretty hard to get your business/plan together, and it seems like such a waste to get to the point where you are talking to investors and then eliminate yourself with such a rookie mistake. If this is new to you, take some time to learn about the investors and what we look for, both positive and negative. There are a number of venues where you can talk with investors in Southern California and I recommend you attend a couple and get some insight. It may be the difference between funding and frustration.

Finally, Some Sanity in the Financial Reform Bill

I ran across a post at Tech Flash, Seattle’s Technology News Source, that says that Senator Dodd’s Financial Reform bill has changed the two provisions that would have negatively affected entrepreneurs search for early stage investors. Originally, one provision sought to raise the limit of an accredited investor from $1M to $2.3M. The current language leaves the level at the $1M but now excludes the value of the primary residence. It also provided that the SEC consider the economic impact of any future changes.

The second provision required entrepreneurs to register with the SEC if they intended to raise money. The new language makes this a requirement for what they call “bad actors” or those entrepreneurs who consistently start bad businesses and lose their investors money.

All in all, not so bad and, more importantly good for entrepreneurs and investors.

What is Driving Senator Dodd in His Financial Reform Bill?

I was catching up on reading through blogs when I came across this post on Venture Capitalist’s Fred Wilson blog AVC http://tinyurl.com/y8nm5vy. If you are an entrepreneur who is currently or will be looking for early stage financing or a person who provides early stage capital, then you need to understand what is being proposed and aggressively oppose it.

Senator Dodd of Connecticut has a Finance Reform Bill moving through the Senate that has a couple of provisions in it that will adversely effect early stage company investing. One is a proposal to raise the criteria of an Accredited Investor from a net worth of $1M to $2.3M. Now I have no idea why this is relevant to bank finance reform? The only connection that I can come up with around the last financial crisis and Angel investing is that Angels now have significantly less money to invest in companies! So, if the passage of this bill shrinks the pool of investors, then even fewer companies will get the funding they need and one of America’s economic development engines will be seriously effected. Has Senator Dodd forgotten how many private sector jobs are created through startups? Is Senator Dodd proposing that people with $2,3M of net worth are that much more able to understand the risks in early stage investing? All the Angel investors that I know are quite aware of the risks.

The other provision, if I understand it, requires businesses to make an SEC filing before seeking capital or they will have to register with each state where they intend to fund raise. There is a post at TechFlash, http://bit.ly/96uuEx, that covers this in much greater detail.

Angel investors and entrepreneurs need to read through these and then think about how this bill will adversely effect them in the future, and, if you come to the same conclusion that I did, contact your Senators and Representatives to oppose the passage of these two provisions.

I also think that someone needs to educate Senator Dodd on the differences between funding early stage companies and bank finance reform. Maybe someone should have him look at the Fortune 500 today and what it looked like ten years ago. How many companies on the list were started in the last 10 years? How many jobs and how much economic impact would be missing if these new companies had not received early stage funding they needed and weren’t able to get started?

This is just so bad in so many ways.