Posted by
Admin on August 24, 2009 |
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While everyone involved is working hard to organise our physical premises in Limerick I have decided to use the services and facilities already in place to open a “virtual incubator”.
This “virtual incubator” will offer all services, knowledge, networking and mentoring that will be offered by the Greenhouse once we open our premises bar the physical office space and investment.
That means that selected start-ups will get dedicated web-hosting, access to cloud infra-structure, a whole range of service, access to our network of top level industry contacts and mentoring. All *free of charge*!
We will be announcing the exact details and application process later this week.
Posted by
Admin on August 24, 2009 |
No commentsLast week I put up a guest post by David Kirk on funding your start-up. The post generated a lot of very interesting discussion so i am happy to put up part 2:
Knowing VC arithmetic and fund metrics is only half of the equation. The numbers in your business plan’s financial forecasts need to positively answer the question “Can I make money with this deal?”
I have three questions, which help me answer that.
1. “Is this a big market?”
2. “Is this a hot product?”
3. “Is this the team that can deliver?”
But what is a “big” market and a “hot” product? It used to be we looked for a $100M of revenue in year-5 in a $1B market. Interesting how that $100M looks strangely similar to the year-5 revenue for exit valuation? It all comes down to “returns”.
Remember to scale down according to your investment needs and the returns needed by the VC. But even if you scale down, the ratio here is interesting. Basically it projects a 10% market share of the available market [I’ll return to available market later.] That’s a good market share target. Greater than 20% market share and you’ll see eyebrows raised and eyes rolling back. Less that 5% and you don’t have the ambition to get a “yes” to question three above.
OK. Available market. This is important, but skip this section of you already understand this.
There are three elements of market size; total market (TM), total available market (TAM) and total serviceable market (TSM). For starters and simplicity I’m going to ignore Total market – I can almost hear that sharp intakes of breath by countless business school professors! The other two are meaningful:
Total Available Market = size of the market that would buy your product
Total Serviceable Market = size of market that you will be selling to.
By way of example, lets say you have a product that disables a laptop if it is stolen.
The Total Market (which is meaningless) is the total number of PC’s in the world.
But this product only runs of Win XP, so the Total Addressable Market is the total number of PC’s, worldwide, running WinXP. This is the count of your potential pipeline of customers. The target customer. Note, you may also segment this further by identifying further target customer attributes, e.g. English speaking.
And, if you only ever plan to sell in Europe, then your Total Serviceable Marketable is the total number of PC’s, in Europe, running WinXP. Now you have a basis for projecting market share and strategic growth.
Without expanding your territory or adding additional OS support to your product, your market share is projected sales/Total Serviceable Market. You can increase your market, both available and serviceable, by expanding your product and your territories. That’s your business decision. As a potential investor, I just want to know I can make money whichever.
Welcome back to those you knew all that.
Now for your financial projections. The old rule of “no hockey sticks” is still relevant. And year-over-year growth is follows the laws of operational physics. I’ve never seen a $10B company double [outside of acquisition], but I have seen a company quintuple its revenues in the early years. Whilst there is no pro forma for revenue growth, I like to apply an operational realistic growth curve to the first five years of financial projections. If year-1 is N, then
Year-2 over Year-1 can be 500%, giving a projection of 5N
Year-3 over Year-2 can be 300%, giving a projection of 15N
Year-4 over Year-3 can be 200%, giving a projection of 30N
Year-5 over Year-4 can be 180%, giving a projection of 54N
Year-1 MUST be a bottoms up calculation, showing that you know the operational reality of the sales channel for your product, and the channel MUST be scalable. Then just make sure that 54N is between 5% and 15% of your addressable/serviceable market!
Just a truism on business plan financial projections.
Revenue NEVER comes as fast as you think.
Cost are ALWAYS greater than you planned.
I expect that, its not a negative the first time, possibly even the second time … stuff happens, but lets hope the error is on the side of planning, verses execution.
And that brings me back to the final question … “Is this the team that can deliver”. At the end of the day, we invest in PEOPLE. There are LOTS of great ideas, big markets and hot products, but the road to financial nirvana is paved with teams of people that just couldn’t deliver.
I rate the management team as:
A … past champions (serial entrepreneurs), they’ve been up the hill before and just need a sounding board
C … first time in the game, need adult supervision
think Bosack & Lerner and Morgridge [Cisco]
Case and Kimsey [AOL]
Andreessen and Clark [Netscape]
Page & Brin and Schmidt [Google]
B… played in a few games, but never scored
In all cases, with the right VC, you get the operational experience you need.
And that is the first 1% of what it takes to get a company funded and make a bucket load of money.
Posted by
Admin on August 18, 2009 |
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One of the smart people I’ve recently met (through Twitter) is David Kirk. I’ll quote from the NI-tech blog to give you an idea of David’s background:
David Kirk is a successful executive, entrepreneur and investor. During his career – almost four decades of software, networking and telecommunications – he has held executive level positions in engineering, marketing and sales, with start-ups and Fortune 10 companies. He was Vice President at American Online (AOL), where he led the world-wide launch of their online service, and managed the development and operations of their business systems, including billing, eCommerce, Internet advertising and fraud management.
After AOL, David was Senior Vice President at Cisco Systems, where he managed their core software development, and was general manager of their enterprise voice business. Currently David is an active private investor, and has board positions on a number of companies, including Axis Three in Belfast. He is passionate about promoting Northern Ireland as a tech destination.
David was born in Belfast, and now resides in San Francisco, California.”
His main activity is as a business advisor & private investor and he has a very strong interest in developing Irish technology start-ups. In the past 2 months alone he has evaluated 60+ business plans from Irish technology companies. Based on this experience he has offered to write a 2-part blog-post on how a VC looks at the funding process and how what calculations a start-up looking for funding should use. Below is the first part of his post:
Whether you are an entrepreneur or a VC – I like to think I have a foot in each camp - we live in interesting times. Barely a month goes by without a new report showing some “interesting” aspect of investment in 2008/2009, whether it be valuation multiples, return multiples, shift in investment stage focus or just the consolidation of funds out there.
While there is, and always will be, market specific conditions that free or freeze funds, the basics of investing in technology companies, remains somewhat constant, and should always be considered as the backdrop to any specific funding strategy.
When a company seeks funding, they are selling themselves and the investment opportunity that their business represents to the investor. I’m of the opinion that selling, whether it be ice cream or cars, is always much more effective when you really know your potential “customer” – their needs, their wants, what they look for, hot buttons, turn off’s. Its no different with VC’s. It’s a business. We need to make money, just like you.
So how does it work?
The returns on any investment, is governed by its risk. The riskier the investment, the higher the returns expected. Investing in technology startup companies is very risky. Failure rates of up to 90% are quoted. VC’s expect and plan for 60-70% of their portfolio companies to fail or limp along. Similarly, investors in venture funds – the Limited Partners – expect a corresponding higher return than safer investments. The US ten-year average returns (IRR) on all venture funds in ~17%.
At this point, the discerning reader has all the information needed to determine every ratio and “rule-of-thumb” that will follow. But there is need for a great big caveat. Presented here will be pro forma numbers. I have never seen, nor heard of any business, investment opportunity or fund that mirrors exactly what is given here. The exactly numbers and ratios are somewhat interesting, more – much more – importantly are the ideas behind the numbers. Grasp these, and you’ll be able to apply the principles to any, real-world situation.
Right. Now that’s out of the way, back to arithmetic.
I’m a fund manager. I have ten portfolio companies. Being smart (i.e. I’ve lost money in the past) I’m planning for three of those companies to fail without returning anything, and three or four to “go nowhere”, returning, perhaps, the money that was invested. That leaves three “winners” in the portfolio to generate all the returns for the limited partners, the “carry” for the General Partners, and to cover the management fees. That means that each of these “winners” has to return x10 – x15 the investment, to cover the “losers” and the “going nowhere”.
My personal rule of thumb is that an investment needs to return x7 – x10 my investment in 3-5 years.
OK. Next we need some discussion on how to calculate “return”. On one hand its very easy to calculate, but the simplicity in calculation, belies an ocean of “art” and “judgment” surrounding it. If my investment in a company buys me x% of equity, then my return is x% of the exit valuation $y. At this point, given two variables, it could almost appear that we can plug in whatever values for x and y we like, to come up with our investment multiple. Not quite. I look for 20%-25% equity in a company (but, full disclosure here, every investor and VC has there own perspective on this). Less and you lose “influence”, more and you risk demotivating the founders. But be very careful here, you’ll hear many times the argument, would you like 80% of $1M business or 20% of a $100M business.
Equity understood. Check!
What about valuation. This is where you will need to do your own analysis, based on industry, business model, geography, etc.. In general, the exit valuate is based on a multiple of either revenue or profit. As an interesting sidebar, in the absence of both – as we experience in 1999 – valuation of those dotcom darlings was $1M per developer. Science? Nay, magic eight ball. Over the past 15 years, predominantly in software, I’ve used smaller and smaller multiples. In the mid-90’s, x5 revenue seemed to fly with trade sales. Today I use x2, and even that is appearing to be generous. Exit or investment valuation is 90% art, 10%science and 100% negotiation. You need to understand this.
OK. At this point you should be able t answer the last question a VC asks “is this a good deal for me?” But there is one big variable that will depend upon whether you are looking for investment from a $1B fund or a $10M fund. That is scale and bandwidth. An individual VC can only adequately manage a handful, or two, of portfolio companies. If there are n VC’s in a $1B fund, then the average deal size is likely ($1B/10n)*.60 (where 60% is ration of funds invested initially). Calculate that out. Perhaps their sweet spot if $5M – and likely you can find this on the home page of their website. So now you have a very simple litmus test.
With a $5M investment (ignoring followon money), a 25% equity position, and an exit value of x2 revenue – the revenue in year 5 should be at least $100M.
Big gulp!!!
Part 2 will go into the first three things a VC looks for in an investment opportunity; a big market, a hot product, and a team that can deliver.
Tags: david kirk, funding, invest, vc