Archive for the ‘Funding’ Category

Mike Milken

During the 2nd week in May the Global Scholars were hosted by the famous Mike Milken (wiki) at his lake side estate at Lake Tahoe. One’s preconceptions of such an event are obviously going to be well above par given this man’s reputation and illustrious path to infamy. The purpose of the trip was to expose us to one of the most successful investors/entrepreneurs the US has to offer. Mr Milken has been acclaimed with creating the market for junk bonds in the 70s & 80s. The “Junk Bond King”, who according to Forbes is one of the world’s top 500 richest men (estimated at 3-8 Billion), has been called the epitome of Wall Street greed. Oliver Stone has stated that his 1980s film Wall Street was based on Mike – although in my opinion the ultra-cool Gordon Gecko character over-glorifies most aspects of the man’s Wall Street activities. Regardless of this, having the opportunity to meet and talk with the Junk Bond King was a unique and once off event – to be embraced and not wasted.

Mr Gecko’s, sorry I mean Mr Milken’s hospitality was next to none in Lake Tahoe. He put us up in his lakeside home at Incline Village and basically gave us free rein of the place. He had a personal trainer on hand to bring us for a scenic hike around tahoe. Its fair to say we were all impressed with his mansion and its impressive décor, which included thee first print of Encyclopaedia Britannica and apparently 2 of the oldest books in the world (religious illustrations)! Over the 3 days he co-hosted various entrepreneurs and investors with the Sierra Nevada College (SNC), in order to provide us with exposure to thought-leading business minds. Some of these included Bob Preger (7th Oracle employee), Roger Wittenberg (Founder of Trex), Bob Goff (Sierra Angels), Rob Loughan (Chairman of Dexterra, profile), John Osborne (CEO of Tarsin), T.J. Matthews (CEO of IGT), Andrew Hargadon (Prof at SNC), Ian Finnimore (Bally Technologies).

Mike spoke about a number of key topics over the 3 days including:
– America’s changing face – Hispanic & Asian
– A new global perspective – competition for human capital
– Democratization of capital
– Capital Markets
– The most powerful face in the world
– Role of future innovation
– Human capital – the most precious asset
– Accelerating medial solutions

Milken proposed the following top 10 problems facing the world: democracy, disease, education, energy, environment, food, population, poverty, terrorism & war, water.

A couple of interesting remarks Mike made over the few days:
– A bid he put in to buy a 99 year lease of Baja California (wiki) for 40 Billion USD!! He explained that the purpose behind this was to give his organisation exclusivity in developing Baja’s public services, utilities, services, schools, hospitals, infrastructure etc.
– Asian nations will make up 60% of the world’s economy by 2040
– Countries with excess liquidity: Norway, Qatar, Singapore, Kuwait, Taiwan, UAE

Mike asked some of the entrepreneurs/investors in attendance to state pieces of advice for aspiring entrepreneurs. Here’s some of their words of wisdom:
Rob Loughan: It’s the journey that counts, not the destination; Timing is everything; Surround yourself with the right people; Take advantage of chaos in the market; Start at the top end of the market (e.g. telco’s, utilities) and dive down to consumer
John Osborne: Regards first mover advantage- most ideas are too early; Support networks are key- its still all about who you know!; Hang on by your fingertips!; Do something different tomorrow; Have fun; Its how you come at problems that important.
Ian Finnimore: Stay wide enough with technology offering so that business can adapt; In relation to the entrepreneurial attitude in the States Ian proposed that this was inherent in the original Pioneers that travelled across the continent creating and occupying American States.
Mike Milken: Make time to think; Your talent pool is the “flat” world; Decide when you’ve enough information to make a decision – when you actually have enough you’re army is usually dead (General Schwarzkopf (Quotes)); One must make mistakes and have problems; Various parameters are important when discussing capital finance- markets, industry, economy, regulation, your company, but most important is society (a company’s benefits to society; values; problems being solved/caused); The best time to borrow is when you don’t need it; Don’t rely on one customer; Opportunity is what you love; “There’s more to life than increasing its speed” (Ghandi).
Sierra Angel #1: focus- small team & resources; team work; persistence
Sierra Archangel: collaboration
Sierra Angel #3: results are key; keep your ears/heart open; persist
Sierra Angel #4: listen to what the customer wants; 4 levels of interest from prospective customers (1) they’ll pay you to build it (2) they’ll buy it from you (3) they’ll consider looking at it (4) they don’t care.
Sierra Angel #5: do your due diligence/home work; build your bets “mouse trap” before seeking investment (prototype & bus => best possible investment deal); Succeed now, contribute in your 30/40s!
Sierra Angel #6: you need a superior product – keep working on it if not; exposure; easy to buy; network is critical – people & team
Sierra Angel #7: Go to market fast; Its the journey that matters


Dilemma: Rich vs King

One topic which has come up time and again during the Global Scholars program has been the issue of Rich vs King. Noam Wasserman from Harvard HBS wrote an article on “The Founder’s Dilemma“. It describes how most entrepreneurs want to make a fortune and run the business singlehanded. But as Wasserman reveals, it’s tough to do both. If you don’t figure out which matters most to you as the entrepreneur/founder, you could end up being neither rich nor in control. Consider that:
– in order to make substantial money from a new venture, you need financial resources to capitalise on the potential opportunity. That means attracting investors— which requires relinquishing control as you give away equity and as investors alter your board’s membership.
– to remain in charge of your business, you have to keep more equity. But that means fewer financial resources to fuel your venture. So, you must choose between money and power. Wasserman suggests that one begins a new venture by articulating their primary motivation for starting the business. Then to understand the trade-offs associated with that goal. As your venture unfolds you must be monogamous with that goal, and make choices that support, rather than jeopardise it.

Cisco FoundersAs an example, Cisco was founded by Stanford graduates Sandy Lerner and LenBosack in 1984. John Morgridge, the first CEO managed to push out the 2 founders in 1990, following difficulty between him and Lerner. Lerner has been described as a “powder keg of passion and emotion who couldn’t conform to the discipline and methods of business management”. Morgridge couldn’t make her fit in, so she was asked to leave and Bosack soon quit thereafter. This is a good example of a Founder struggling to deal with removal from the “King” role and ultimately being forced out of the venture.

The CEO of startup XYZ who I have met in Silicon Valley, and who is at Series C VC funding, approaches his position as Founder CEO pragmatically, or at least this is what he communicates. I found his attitude very interesting – that he goes to work everyday knowing that it could be his last as CEO of the company he founded. When we met him he acknowledged that any day the VCs involved with his company could decide to replace him as CEO, and that he was willing to accept this decision. I was unsure whether I believed him but was willing to give me the benefit of the doubt. Noam Wasserman suggested that CEOs will often tell VCs that they’re willing to stand aside at any time, but whether they mean this is a completely different matter!

My View: Through my training as a Global Scholar I have learned that the Founder does not encapsulate the company. One should always separate themselves from the business entity from the start. It’s important to consider what’s best for the business as a sole entity, separate from the interests of the founder(s). This is the approach adopted by the Stanford Enterprise Center regarding University spinouts – they actually make founders apply to the Enterprise Center in order to obtain the license for technology they themselves created – thus competing with any other company for rights to develop the technology/concept/business! This is basically the Rich approach, as apposed to King, as it necessitates relinquishing equity to foster rapid development.

This is a hard lesson to take on board in my opinion. To generate new business concepts or technologies with the altruistic view that they are separate encapsulated business entities, and to always act agnostically in the best interest of that technology or business (i.e. solving the real world pain most efficiently) is a difficult position to take. But again the decision to take this position comes back to why you’re creating the business in the first place. If you’re creating the business to resolve some real-world pain/problem then this should be the focus regardless of whether you’re CEO or not. Letting one’s ego/emotions get in the way (the King approach) of the rapid progress and development of a business (e.g. seeking VC) which solves this “pain” should perhaps be considered selfish/self-centered/egotistical? I’m not sure there’s a right or wrong answer to this issue, but if you surrounding yourself with an ‘A’ team (including management, investors & advisory board) then I think you should certainly be able to find appropriate resolutions. Some more thoughts…

It seems ridiculous that a founder should have right of passage to the CEO position when a company is functioning and operating 100%, and is significantly funded by external entities. If one doesn’t have experience in such a role, why would it make sense? Founders’ passion is an essential ingredient to the persistence required at the startup phase. It can assist a founding CEO in evolving and learning rapidly on the fly. OR this emotional attachment could hinder their ability to function effectively as a MNC’s CEO, and make logical decisions about the company’s future.

However this is my view on the theory behind the rich vs king (Founders as CEOs) dilemma. In practice I would deal this issue dynamically, by having a candid/open/honest conversation with potential investors to discuss my intentions/desires to (not) maintain the CEO position. I would establish clear grounds under which I would maintain or relinquish the position, and the consequences of each:
– Maintain it: if milestones and targets are met. Subsequently increased job (CEO) security (and other incentives) could be provided to allow the CEO to function more effectively and under less unnecessary pressure.
– Relinquish it: a worse case scenario could be established to allow the founder to take another position in the company, perhaps as CTO or as right-hand-man to the CEO? This could take the form of the Founder “Co-CEO” using their extensive knowledge of the business and intimate understanding of it to compliment the new CEO’s superior management and economic knowledge.

There may be various possible solutions to the ‘Rich vs King’ dilemma but I still think that having the right type of management, investment, advice team is key. This has been reiterated by alot of the thought-leaders I have encountered in the Global Scholars program. But most recently this was advice given to me by the Cisco kingpin himself – John Chambers!

Next Stop…..Governator Central

copy-of-img_4803.jpgWeek 5: 18-22 Feb: We moved onto San Jose, California, on Sunday 17th after a 6hr delay at Kansas City airport which was closed due to severe snow storms. During the delay some of us slept and some worked!! It was warmer in CA to say the least, about 20C! Monday was spent in San Fran touring about seeing most of the sites around Fisherman’s Wharf. Owen and I also cycled across the Golden Gate bridge to what I think is one of the best viewing points in the city.

On Tuesday 19th we went to ‘Wilson, Sonsini, Goodrich & Rosati’, the premier legal advisor to technology and growth enterprises worldwide, as well as the investment banks and venture capital firms that finance them. Two representatives from WSGR discussed IP issues in technology ventures.

2ndlife.pngIn the afternoon we visited Linden Labs, which was founded in 1999 by Philip Rosedale to create a revolutionary new form of shared experience known as Second Life. Second Life is a 3D virtual world entirely created by its Residents that’s bursting with entertainment, experiences, and opportunity. The Second Life Grid provides the platform where Second Life resides and offers the tools for business, educators, nonprofits, and entrepreneurs to develop a virtual presence. Headquartered in San Francisco, Linden Lab has over 200 employees spread across the U.S., Europe, and Asia. Although our visit to Linden Labs was brief we had a change to get some insight into where Linden Labs is going with Second Life in the future. They were more than willing to answer all our questions. Second Life generated some interesting debate among the group. Some of the group had difficulty seeing its practical usefulness, whereas the rest of us saw endless opportunities for the platform in the future.

sbiodesign.jpgWednesday 20th saw us at Biodesign, a Stanford University initiative encouraging multidisciplinary approaches to biology and medicine. Biodesign are refining a method that produces both world-class innovators and state-of-the-art medical devices. We were introduced to the biodesign leadership (incl Sandy Miller) and fellows from both the US and India. We had a chance to tour the Stanford campus during lunch before continuing with a seminar by a biodesign spinout company – Simpirica Spine. The CEO gave us some practical insight in the startup process based on his own experiences. He shared his experience of equity dilution through various rounds of investment as well as many other

msstartupzone.jpgOn Thursday we visited Microsoft’s campus in Silicon Valley where we met Dan’l Lewin, corporate vice president of Strategic and Emerging Business Development, Don Dodge from Microsoft’s Emerging Business Team (& ex-Napster VP), Roy Levin Distinguished Engineer and Director, Microsoft Research Silicon Valley, as well as the general manager of the Microsoft Startup Zone. I had the privilege to chat with Roy after the formal presentations about pervasive computing and how he envisions its realisation in the future. I have my own specific thoughts on the matter but it was insightful to have a conversation with such a seasoned computing researcher and visionary.

Following the slightly rushed MS visit we went to the British consulate in San Fran. They offered us the opportunity to utilise their extensive network in Silicon Valley. Also they detailed some grant support which is available for us to attend conferences and companies in the US. In the afternoon we visited iRhythm, a biodesign startup in the medical devices area. The CMO at iRhythm, Uday, detailed some of trials and tribulations of starting a business. Uday’s talk was very impressive, he provided practical and insightful advice for us going forward and starting our businesses.

otl.gifOn Friday we attended Stanford’s Office of Technology Licensing. Linda Chao brought us through Stanford’s approach to technology licensing and related equity issues. This proved a very interesting talk as probed Linda for information on how University spin-offs are handled by one of the world’s leading research and teaching institutions. Basically Stanford claims IP on everything developed through the use of their resources. Not only do they pay for IP protection, such as patenting, but they are also willing to enforce IP – this being the main reason why anyone would want to license IP they generated from an institution such as Stanford.

johnhennessy.jpgOn Friday afternoon, after a long tour of Stanford’s campus we all attended the launch of Stanford’s Entrepreneurship Week and their annual Innovation Tournament – which this year requires entrants to add as much value as possible to a rubber band(s) within 1 week. Prof. John Hennessy, President of Stanford, gave the introductory speech for the launch in which he talked about Karl Schramm, the Kauffman Foundation and its global role in entrepreneurship education.


Entrepreneurial marketing & Sales – Bill Aulet

bill_aulet.jpgDay 13, Wednesday 6th Feb: Bill Aulet is a senior lecturer at MIT’s Sloan School of Management and Entrepreneur in Residence at the MIT Entrepreneurship Center. He has 25 years of experience in technology business operations and financing. He started his career at IBM and then ran two private companies, Cambridge Decision Dynamics and SensAble Technologies. Most recently he helped engineer a dramatic turnaround at Viisage Technology as its Chief Financial Officer. He has created hundreds of millions of dollars of shareholder value by building focused, fundamentally sound businesses. He has raised $100 million in institutional financing via private placements and public offerings. Mr. Aulet now works with students and start-up companies to build strategies and operating plans that will create sustainable value. He has an undergraduate degree from Harvard University and a graduate degree from the MIT Sloan School of Management, where he was a Sloan Fellow. 

Bill’s seminar titled “Entrepreneurial Marketing & Sales”was most definitely my favourite seminar so far as a Global Scholar. His unique combination of commercial “successes” and “failures”, academic excellence, and charisma makes him intriguing to listen to. When Bill started talking about this experiences my brain clicked into auto-pilot as he shared such practical and interesting knowledge with us. I felt privileged to have the opportunity to meet with him in a small seminar. Talks like Bill’s are what make the Kauffman Fellowship so unique – you simply wouldn’t hear it in ANY business school! His presentation was in 2 parts, with the following specific outcomes related to each part:
Part 1
1. Increase understanding of the definition of entrepreneurial marketing
      – How entrepreneurial marketing differs from traditional marketing
      – The different elements of marketing and what is most important to an entrepreneur
2. Increase understanding of the role of entrepreneurial marketing
      – Unique and crucial role
      – How integrates with other functions
3. Increase understanding of how to effectively implement this function in a new enterprise
      – Framework
      – Practical considerations and tradeoffs
Part 2
1. Increase understanding of the different types of customers when starting a business
2. Become comfortable with steps and elements of Entrepreneurial Marketing Implementation Framework
3. Real world case studies – SensAble Technologies & Brontes Technologies

Some of the main points Bill emphasised included the following:
Team goals
– Co-founders MUST be aware of what each member of the team wants out of the project, what their vision is, when/how they want to exit.
– There MUST be synchronicity among the team in this regard to be successful
– Being aware of this makes the journey and decision encountered easier, or at least oriented in a direction.
Market selection – need to be able to do disciplined market selection, and have the ability to deselect markets (in order to focus the business)
– Get extremely efficient at one market
– Don’t sell your soul (diversify unnecessarily) for money, or payroll (easier said than done)
Raison d’Etre
      – Product Innovation
      – Low Price
      – Customer Intimacy
– 3 question to bare in mind when selecting a market
      – What do we want?
      – What are our competitors doing?
      – What do our customers want?
– Get to know and understand the customer intimately – entrepreneurial marketing is a not a spectator sport!
      – What’s their real pain?
      – Is it common among customers?
      – Can I address it effectively in a unique way?
      – Keep asking them questions….
      – Customer does not imply Market!
– Technology push versus market pull
– * Book: Geoffrey A Moore – ‘Inside the Tornado’ (Google books)
– * Book: Richard C. Dorf, Thomas H. Byers – Technology Ventures: From Idea to Enterprise (Google books)
– Categories of technology adopters – same as Melissa Schilling’s description
– Bill discussed how one crosses the charm between some sales to innovators & early adopters to determining the beachhead market.
– A key thing is doing this is
      – (as mentioned above) becoming “intimate” with your initial innovator customers – leverage the first pin/beachead
      – Carrying out a comprehensive and tedious market analysis
– When obtaining first VC funding:
      – Better to obtain too much $ than too little
      – Need to be 100% confident that you can meet objectives within time with available money
      – Get continuous advice from mentors as VC will abuse their dominant position dealing with a novice
      – “The most important thing during funding cycles is that the team doesn’t cut corners on culture
– When crossing the chasm:
      – Revenue may be reasonably high but profit will most likely be non-existent – which will be part of the plan
– Bill’s marketing mantra – “Keep the main thing the main thing”
– Take the business very seriously, but not yourself
– “An entrepreneur is the person who solves the right problem at the right time
– Reoccurring revenue is king
– Innovate on the business model – be disruptive here, not just on technology (e.g. Google)
– Bill advised us to try and maintain the attitude that “I am always open to rational business discussions”


Entrepreneurial Finance – Ramana Nanda

ramana_nanda.jpgDay 12, Tuesday 5th Feb: Ramans Nanda is assistant professor of business administration at the Harvard business school. He currently teaches Entrepreneurial Management in the first year of the MBA program.  He has also had teaching experience in Entrepreneurial Finance at MIT’s Sloan School of Management. Ramana went into brilliant detail on how to value new ventures seeking ‘Series A’ VC funding. He was very thorough in detailing VC Term Sheet pitfalls. We went through a case study on start-up valuations and used this as basis to discuss the finer details of valuation techniques & formulae. Some of the obvious techniques for valuation:
– Projections, bottomup – Discounter Cash Flow (DCF)
– Competitors/Comparables
– Whats in the package – team, IP, products etc..
– “VC method”

In relation to the “VC method” Ramana focused on the dynamic relationship between Projected Market Value, Discount Rates, Post Money Valuation and VC investment. After a brief well needed interval Ramana proceeded to discuss Convertible Preferred Stock and Participating Convertible Preferred Stock. This was something covered by Niall O’Donnell last week but Ramana’s version was from a academic stand point whereas Niall’s appeared to be derived more from practical experience as a VC. The seminar then changed to a discussion on the Board of Directors and various issues related to Director selection including:
– Experience – in business, with vast contacts/networks
– Scientific Advisory Board – implies legitimacy (used where appropriate)
– Widespread resources across various Directors
– Odd number of Directors – avoid stalemates
– Authority/conflict of interest issues related to have VPs on board alongside CEO


Angel & VC Equity

mhudson.jpgDay 8, Wednesday 30th Jan: Marianne Hudson from Angel Capital Association spoke with us about ‘Trends in early stage equity and Angel investors’. Marianne emphasised a few key points surrounding angel investment:
– Angel funding is more likely as seed funding
– Seek our angels that can make an intellectual contribution
– Who can provide advice, not just $$$
– How to value company accurately pre-investment
– Value based on a combination of IP, contracts, sales, brand/goodwill
– Usually a 4x sales valuation
– Identify angels with whom you have chemistry, thrust, rapport
– Use referred angels – more likely to obtain investment
– Angels assume you’re going to exit
– Family business => not for equity investment
– Pitching for angel funding – Passion is key
– If you haven’t attracted investments from some of your friends and family money – why not? Also have you invested your own money?
– They’re looking for the type of people who have been working long hours unpaid on a project.
– The person is the product being pitched to angels…
– Kauffman Foundation’s resources for funding sources available online at the KF’s eventuring website.

On Wednesday I also went to a meeting with Merrilea Mayo, Director, Future of Learning Initiatives at the Kauffman Foundation. She is currently involved in a project to deploy learning-centric sports applications on mobile devices. I volunteered with three of the other Global Scholars to meet Merrilea and discuss the project and some ideas I had about location-based sports/educational games, Bluetooth tagging and Bluetooth pushing. We also volunteered to assist the software company developing the J2ME app with evaluations of the current prototype of the application.

nodonnell.jpgNiall O’Donnell is a Kauffman Associate and Fellow, and is currently working with RiverVest venture capitalist firm.  Dr. O’Donnell has drug discovery and development experience and a strong background in immunology. He has been involved in the formation of early-stage biotechnology companies, including a start-up developing novel peptide-based therapeutics for the treatment of pulmonary and liver fibrosis.  In addition, he has worked with an Eli Lilly spin-out developing treatment for Crohn’s Disease by targeting Toll-like receptors. And last but not least Niall is from Omagh in CO. Tyrone, Northern Ireland! Niall gave us insight into his industry and advice on how to approach Angel and VC funding. Some key points from his seminar:
– Niall provided us with a sample Term Sheet for future reference when negotiating VC terms

– Types of funding:
      – 3xF’s, Angel 50-100K; VCs up to 20/30M, Hedge funds 100s Ms
– Don’t take money from people who don’t add value to the team
      – Enlist respected advisors & mentors
      – Find out their track record of investments and exits
      – Do you like and thrust them? Rapport?
– Exit horizon – how far along is it?
– Parallel lines in embedded graph details sweet spot which combines
      – % risk failure – how far along timeline/lifecycle
      – Company value – VC will try to invest exactly at point ‘Series A’
      – Cumulative cost – not shown in this graph

– “No one ever got sacked for buying legacy solutions!”
– Partner with bit 800lb gorilla in the industry! – show them how good your product is.
Valuing company:
– Overvalue – pointless as wont get funding
– Undervalue – want fair market value
– Comparisons are king – review similar companies that obtained funding recently (analogous to house prices on the same street!!)


– Convertible preferred stock vrs participating preferred stock
      – Non-participating – profits shared based on equity from start
      – Participating – investor gets initial investment out first
– Anti-dilution policies in VC Term Sheets
      – Full ratchet anti-dilution – maybe for mezzanine funding when near IPO; or dangerously close to something truly innovative. But to be avoided at all other times!
      – Weighted average anti-dilution – standard/common approach
      – No anti-dilution terms – VC keeps same shares – very unlikely
– Board members
      – Odd number
      – Founder, 2-3 VCs, Independent specialist (with entrepreneurial track record and market knowledge)
– Term sheets – some key red flags
      – 3X or above – would imply investor gets 3 times initial investment before
      – Full ratchet
      – Board with no industrial experience (lifestyle board)
      – Big board => dysfunctional (maybe 5/7)
      – Only 1 investor/VC – lack of opinion and network
      – No shop – stops me…
            …shopping around for other VCs
            …potentially finding the true market value of the company
      – Voting byclass – VC can block exit/new investment
      – Options pool – good investor will want to recharge options @ each round
            Provides incentives – need to carve this out at start.
            Series A 15-20%; Series B 5-10 % of total shares.
– Beware of VCs pushing Series A expenditure to allow them to invest more at Series B before value decreases too much!

mrk.gifOn Wednesday night we watched a film about Ewing Marion Kauffman’s life, titled: “Mr. K: A Common Man With Uncommon Vision”. This film biography captures Ewing Kauffman’s unconventional approach to life as a great American entrepreneur, Major League Baseball team owner, and philanthropist. It was a very inspiring film and I highly recommend watching it. Key to the whole story was his dedication to: sharing profits, working hard, his employees or associates as he called them. By the time Mr Kauffman’s company reached its IPO stage everyone shared in the wealth, making many people millionaires many times over, from admin assistants to VPs!