Category Archives for Business

This is what Equity Fingerprint is all about

20071206-DSC_0238Image by Eric Hamilton via FlickrFred Wilson of A VC blog gives a very simple explanation of what Equity Fingerprint, the business plan resource, is all about. I copy his post below to save you pressing on any more keys. Active Equity Companies rely on an unwritten rule between the founders and the investors (people and cash) that they will keep building value and work together. The real bummer happens when eveyone is working hard and the market just moves in a different direction leading to a down round. It is tough but if you understand Equity Fingerprint and keep building value, the market will swing round and it will soon be your day around.

People ask me if a recession is a good time to start a business – of course it is as there are plenty of resources available. And you are forced to concentrate on the customers or market need. Her is Fred’s post to save you clicking again:

Taking Risk and Mitigating Risk

When I think about the venture capital business, I think about risk. It’s one of the riskiest investment types there is. But as they teach you in business school, risk and return are highly correlated over the long haul.

What we want to do in the venture capital business is take a lot of risk (which should be rewarded with a low entry valuation) and then actively mitigate the risk we took as much as we can (thereby reducing the risk for future investors and increasing the valuation).

It’s the same thing that entrepreneurs want to do. When they leave their safe job and go out on their own, they are taking a lot of risk. Their entry valuation should be zero, meaning they (collectively if they have partners) own 100% of the business for whatever startup capital they invest.

By the time they offer equity to new investors, they should have reduced some of the risk. By developing a product, or by developing a technical and operating plan, by attracting other talented people to the team, or by getting customers and revenues (and sometimes even profits).

However markets are not rational. Investors will price risk (and therefore value a business) differently at different times.

I think a good example is comScore, a company I helped provide the first venture capital to in 1999. Along with Bruce Golden of Accel Partners, we invested something like $6mm into comScore in August 1999. It was a typical early stage venture round where the investors purchased approximately 1/3 of the business for the invested capital.

A year late, in the summer of 2000, investors valued comScore at something like $140mm. The company had mitigated a lot of risk in the year that had passed. The technology was built, the service was launching, the team was hired, and the future was bright. But investors missed the fact that the Internet market (ie the customers), at least version 1.0 of the Internet market, was a mess and getting worse. And the next twelve months were ugly, really ugly.

The next round was completed at a fraction of that $140mm valuation and it took something like five or six years for the company to get back to that $140mm valuation. Today, comScore is a public company with a market cap of $670mm.

comScore’s founders Magid Abraham and Gian Fulgoni did a great job of mitigating the risk in the deal year after year and they and their shareholders, including me, have been rewarded. But it wasn’t a straight line up. Partially because markets are irrational and partly because new risks showed up that we had no idea were coming.

Both of those things are always going to be true. Markets are never rational in the short term. And almost always rational in the long run. So my approach to that fact is to keep a lot of “dry powder” and invest in every round at our pro-rata share or less if the price seems truly irrational. Early stage venture capital is often less susceptible to market gyrations because we get our ownership at a low valuation and keep it but generally don’t increase it much as the valuations increase. And you have to be patient and ride the gyrations out, as long as the company is doing its job of mitigating risk.

And new risks will always show up. No investment plays out the way you think it is going to play out when you make the investment. So you can never price the risks you are taking correctly. My approach to that is to two fold. Don’t freak out too badly when the risks you never saw show up. And have a lot of “dry powder” to insure that you and the company can face the risks, deal with them, and mitigate them as well.

Risk and return are correlated in the long run. Taking risks is the key to making big returns. But you must learn to live with risk, mitigate risk, and price risk as best you can.”

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reboot10 on 26/27 June in Copenhagen

Do you want to know all the latest on the social network scene then visit reboot10?

“reboot is a community event for the practical visionaries who are at the intersection of digital technology and change all around us…

2 days a year. 500 people. A journey into the interconnectedness of creation, participation, values, openness, decentralization, collaboration, complexity, technology, p2p, humanities, connectedness and many more areas.

Applied towards us as individuals, citizens, teachers, culture workers, entrepreneurs, creators and change makers.

This years subject for exploration by all of us is “free” – as in free to flow, no only the price point free. Read more about “free”…”

Tipped for the top of Tesco?

The Daily Telegraph feature called Public Life on 15 May 2008 introduces a new Tesco star to the world, Daniel Gilesenan.  As Tesco moves from a UK grocer to a major international corporation with M & A activity round the world, perhaps the next leader will come from the corporate world.  Gilesnan is Tesco: business development director reporting directly to the main board.  Having “excelled in financial studies at the University of Queensland he found his feet in quickly in the deal making world” of London with Deutsche Bank where he made “some serious” money.

His interest in Asia will help Tesco’s expansion plans.  However unlike the current leader of Tesco, he manages to “perform at reasonable level while remaining somewhat disengaged”.

One to watch I guess as the senior team are paid “serious money” but disengaged they are not.  Watch this space!

Lots of people at Net-a-Porter.com

290 people work in London and New York for Net-a-Porter.com, the company run by Natalie Massenet.  Perhaps that is why she is believed to be securing more funding to add to the current list of investors: Richemont, the French luxury good group and Baywinds, a Venezuelan company which both hold 28pc stakes.  Ms Massenet is believed to hold 17pc.  With hopes of the upmarket fashion business being worth as much as £250m.

Bebo employed around 100 when it was sold for $800million and CraigsList employs around 25 with a valuation of billions.

Someone has missed the Web2.0 plot; so let us hope all the beautiful people like the frocks.   Further dilution is on the cards and the Equity Fingerprint is not looking top draw.

Prelude Trust has no place to hide

Prelude Trust has failed to back the winners and cannot raise further funds. You think it is tough being an entrepreneur, try being a VC. So Prelude follows Gateway, TTP Ventures and Avlar leaving Amadeus as the sole survivor in Cambridge now that 3i has closed down their local office. The new technology business is the toughest of the tough and even some angels are cutting back.

You have to admire the style of the VCs who are taking over the management contract. Important things first – let’s get the carry percent worked out:

"certain members of the New Manager will indirectly make
capital commitments equal to 1 per cent. of the total capital committed to the
Purchaser, and, in addition to their pro rata share of the proceeds received by
the Purchaser on realisation of the Portfolio, will receive a carried interest"
calculated by reference to the Purchaser's total profit.

Monster-Bankers

Readers of the Financial Times will be familiar with the paradox that Germany, probably the biggest winner from globalisation among rich countries, is at the same time a deep well of paranoia about and veritable fount of vituperation against the sources of its riches.

EEDA speak for Business Link!

Big MediumImage via WikipediaFrom the CEN of Friday 9 May 2008; what does this mean? How can people who talk in such tongues deliver or provide good advice?

“Pat Smith, chief executive officer of Business Link in the East of England, said “With the creation of one regional Business Link, our key objective was to strengthen and improve the free service available to small and medium sized enterprises. We changed how we worked by moving from a deliverer of business services to a provider of impartial business information and advice, combined with acting as a broker of third party solution providers…….has put on an array of workshops attracting approaching 14,000 delegates, 54% women.”

So presumably we will now see, at last some would say, a boom in the number of women starting businesses. Let us hope that their sale pitch is clearer – will they be deliverers or providers? Were all the staff re-trained from deliverers to providers?

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Ask for the order! Again

Steve Smith (American Dad!)Image via WikipediaFred Wilson repeats the wise words we all need to remember:

Words of wisdom from Steve Kane (actually Steve’s dad):

btw, the best advice my old man gave, and the advice he drilled most emphatically and repeatedly was, ASK FOR THE ORDER. you’d be amzed how many people talk to customers forever and never actually say ask for the order…

I saw Steve’s comment right after I read a long email from an entrepreneur (way too long, emails should be no more than three paragraphs) that went on and on about his business but never once asked us to consider an investment.

Ask for the order.

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Xensource goes missing with $500million!

View over Trinity College, Gonville and Caius, Trinity Hall and Clare College towards King’s College Chapel, seen from St John’s College chapel. On the left, just in front of Kings College chapel, is the University Senate HouseImage via WikipediaOn 22 October 2007 Centrix announced the $500million acquisition of Xensource for $500million payable in a mixture of cash and Citrix stock. Xen appears to have started in the University of Cambridge Computer Laboratories where one of the founders, Ian Pratt, works. Ian Pratt is named as the founder of Xensource in this bio of Simon Crosby and it states that “Simon was a tenured faculty member at the University of Cambridge, UK, where he led research on network performance and control, and multimedia operating systems”. The press release 15 august 2007 states “for approximately $500 million in a combination of cash and stock, which includes the assumption of approximately $107 million in unvested stock options.”.

Tech Confidential spills some of the beans ” You don’t hear as much about Kleiner Perkins Caufield & Byers and Sevin Rosen as you used to. Kleiner Perkins is busy investing in anything but consumer Internet companies while Sevin Rosen decided against raising another fund last year. But, they are still cashing checks. The pair invested $6 million in a first round investment in January 2005 into XenSource, an open source virtualization startup that agreed to be purchased by Citrix Systems for $500 million.That’s a big hit for the duo. Other beneficiaries include Accel Partners, Ignition Partners and New Enterprise Associates“.

Silicon Beats mentioned the investment round and commented “Silicon Valley’s best-known venture firm, Kleiner Perkins Caufield & Byers, has teamed up with Sevin Rosen Funds to invest $6 million in XenSource, of Palo Alto.

XenSource offers a so-called open source virtualization technology, which we’ll leave for open source fans to comment on. But as XenSource’s folks put it, virtualization “allows enterprises to realize significant savings from server consolidation running multiple operating systems and mission critical applications on a single server.”

Kleiner’s Kevin Compton and Sevin Rosen’s Nick Sturiale will join the board. Founders include the leader of the Xen project, Ian Pratt of the University of Cambridge, Nick Gault, an enterprise software veteran and formerly founder of Network Physics, and Open Source veteran and openMosix leader Moshe Bar. Pratt and his co-founders at the University of Cambridge will continue todevelop the technology and manage the Xen Open Source community project, the company said.”

Now that is a lot of wonga. Where did it all go? How much stayed in Cambridge? Was Cambridge Enterprise involved? It would have ranked as one of their top investments. If not, why not? Why was such a good deal funded outside of the Cambridge Cluster? Did any of the Cambridge Angels or the other groups invest? There is no trace of Xensource on the Cambridge Evening News website. It would make a great Equity Fingerprint and case study but I guess it was registered in Delaware and so all the details are not available. Hopefully the Cambridge Cluster has a couple or ten of new angels to keep turning the wheels. Just think what the Cambridge Cluster could have done with $500million……

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Perfect Pitch at Seedcamp

Seedcamp has a video on the front page to inspire entrepreneurs to join their one week camp.  Rowland of king.com sums up the perfect pitch.  It is three sentences:

– what does your business do?

– why is it special?

– why is it going to be successful?

Say it every day to anyone who listens until you have refined it and refined it and are ready to blast the VCs away!  It is so easy to help someone else and so difficult to do it on your own.