Resources Posts

M&A Hacks

Nivi · October 25th, 2007

ambition.jpg

Suzanne Dingwall Williams is publishing M&A hacks on her excellent blog, Venture Law Lines. She call the series: ‘Selling the Startup’,

Selling the Startup: Can you sell your subscriber base?

“Recently, a new client received a very favourable takeover offer for her business, including its subscriber base. Problem: the privacy policy did not permit her to provide the account information for her subscriber base to the acquirer. Same thing with the user license: it was non-transferable. We had to go back and rectify the matter in a ponderous way before closing.”

Selling the Startup: Providing Price Protection in the Term Sheet

“As a general rule, [M&A] term sheets provide for price adjustment based on revenues and a closing balance sheet, and based on the results of the buyer’s due diligence (this is really a price reduction clause, as no one ever finishes due diligence and concludes “By God, they’re really onto something here. Raise the price!”). Here are three other areas where you, as seller, need to consider providing for some price protection…”

A couple more gems from her excellent blog:

On Being An “Off the Grid” Startup

“The reality is that 95% or more of North American startups are created outside of Silicon Valley. Many are created in fairly robust business generation centres such as Boston, and emerging centres such as Chicago and Raleigh-Durham. Just as many are created in regions where the startup infrastructure is small or non-existent. Do the practices, deal terms, and operational decisions typically made by startups in the overheated Valley, with its cadre of serial entrepreneurs and super-angels, have any application for the rest of us, who are off the Silicon Valley grid?”

If Venture Capital is Dead [in Canada], What’s Next?

“Venture capital in Canada is no longer an industry, but a financial product offered by only a handful of players…

“When someone finally says this, I’ll agree. But I’ll also say that, as someone who advises entrepreneurs, I don’t particularly care. All this tells me is that companies will now use different financial tools to feed growth, using business plans that are not shoehorned into the somewhat artificial venture capital model for growth—i.e., in and out in 3-7 years.”

Suzanne’s resume includes roles as Founder of Venture Law Associates (a Canadian law firm with flat rate service for inventors and early stage companies), Principal at BCE Capital, and Senior Counsel at Nortel.

Image Source: Despair.

Why investors don't always do the right thing

Nivi · August 3rd, 2007

bill-burnham.jpgIn Understanding Why Your VC Is Acting Crazy, Bill Burnham, a former Partner at Mobius Venture Capital and Softbank Capital Partners, describes why investors don’t always do the right thing for your business:

“One thing that many entrepreneurs don’t fully appreciate is just how much the financial and organizational dynamics within a VC fund can affect how a VC behaves on their board. Over the years I have heard many stories from entrepreneurs expressing various degrees of frustration and mystification over a position taken by their VCs, usually with regards to an upcoming financing or an M&A transaction. For example, in some cases a VC that has been very supportive about patiently growing a business all of a sudden becomes obsessed with selling the company or in others a VC that has been aggressively pushing the company to grow quickly all of sudden becomes extremely cost focused and lobbies hard to cut the burn rate despite the fact that this will kill growth. After witnessing such abrupt changes in attitude and direction, many entrepreneurs are left scratching their heads wondering “What the hell is going on with my VC and why are they acting so crazy?”

“The answer to this question can often be found by simply getting a better understanding of the current financial and organizational dynamics within a VC’s fund, as these issues can have a profound impact on how a VC and/or their fund approaches a specific investment. With that in mind, here is some specific advice for entrepreneurs in terms of what questions they should be asking VCs and what information they should be monitoring.”

Your investors are your partners and they will help you build your business—to a point. Some of their interests may be deleterious to your business.

Frankly, some of your interests may be deleterious to the business. But I’ll give you the benefit of the doubt since you’re the guy who probably lived in your parent’s basement and ate rice cakes for 3 months to start the business. I assume you’re committed to the business—to a point.

Read the rest of Bill Burnham’s article.

A few hacks from our personal blogs

Nivi · July 14th, 2007

Sorry we haven’t posted for a few days—we’ll get back to venture hacking this week. In the meantime, here are some hacks from the deep recesses of our personal blogs…

Naval

VC Bundling

Microsoft bundles its Office applications. Record Labels and Game Publishers bundle cash and distribution. Silicon Valley Venture Capital bundles Advice, Control, and Money. In lean times, you, the entrepreneur, have to buy the bundled good.

Want Cash? It comes bundled with an Advisor on your Board of Directors, like it or not. And they take Control.

Want Advice? VCs won’t take Board seats without putting in Cash – it’s the only way to get enough leverage. And they take Control. Always the Control.

Smart entrepreneurs in times of plenty (like our current financing bubblet), serial entrepreneurs, and those with profitable businesses break apart these bundles. To un-bundle, you must have multiple bidders (that’s a longer entry), and you must have the ability to refuse capital (on Sand Hill Road, collusion is just a lunch away).

Lawyers or Insurance Salesmen?

Watch out for the bait-and-switch – this is when you interview the gregarious, smart senior partner, who then swaps in the less popular, less experienced partner once you’ve signed them up. And the new person might be cheaper, but not much cheaper.

Put them on fixed-fee per job, especially for closing a financing, and especially for lawyers for the other side (one of the old great VC tricks is that startups pay for the VC’s attorneys in closings! A ridiculous practice justified as being “standard”)

The 80-hour Myth

Let’s get serious. Nobody works eighty hours a week. Not eighty real, productive hours. Look closely at workaholics (and I’ve been one, and worked with ones), and a lot of the time is spent idling, re-charging, cycling, switching gears, etc. In the old days this was water-cooler talk. In Silicon Valley, it’s gaming, email, IM, lunches, and idle meetings. Let’s drop the farce, ok?

Nivi

Don’t target large and obvious markets?

“Because the process of securing funding forces many potentially disruptive ideas to get shaped instead as sustaining innovations that target large and obvious markets, the very process of getting the money to start a venture actually sends many of them on a march toward failure.”

Womb-to-tomb Investing

“… failure to execute operationally is not the only source of risk [in startups]; every venture is also subject to volatility in the price and availability of capital due to the volatility of the stock market. After the collapse of the Internet Bubble, many promising companies foundered because their funding dried up.

… [Warburg Pincus has] supported the multi-year process of building a sustainable business by underwriting all of the capital needed to reach positive cash flow, thereby not only enabling management to focus full-time on the business but also insuring against the risks generated by a volatile stock market.”

Dear M.B.A.,

“Morons! I know there’s nothing out there. That’s why I want to build the railroad!”

HubSpot's founder on negotiating with investors

Nivi · May 31st, 2007

dharmesh.jpgDharmesh Shah recently wrote a very nice review of Venture Hacks. The article includes great meta-advice about fund raising:

“1. VC Negotiation Is An Art Form: As an entrepreneur, there are few things more “nuanced” that you’ll deal with than raising institutional capital. Even if you decide not to raise venture capital, a lot of these skills and deal-terms will likely show up in other dealings you have (strategic partners, M&A transactions, etc.).

“2. The Devil’s In The Details: Most entrepreneurs focus too much energy on the “obvious” things like valuation. Fact is, there are other, non-valuation terms in the VC deal (vesting, stock option pool, liquidity preferences, etc.) that have a significant impact on the economics of your deal. It’s easy to lure yourself into thinking you should solve for the highest valuation. But, in most cases, that’s sub-optimal.”

I would go even further: non-valuation terms are more important than valuation. Valuation is temporary, control is forever. If you don’t control your future, your current valuation is irrelevant.

Your current valuation is irrelevant if you are terminated and you lose all your unvested stock. Your current valuation is irrelevant if the board forces the company to raise a low-valuation Series B from existing investors by rejecting offers until the company is almost out of cash.

“3. Great Advice Is Hard To Find: As it turns out, good advice in the VC business is hard to find. I would define good advice as a combination of competency (i.e. well informed) and objective (i.e. non-conflicted). You can get close sometimes (via lawyers, advisors, etc.) but it’s really hard to find great advice.”

The amount of advice on entrepreneurship on the Web is exploding. Some of it rocks. Some of it sucks. Advice is only as good as its source. Our source is me and Naval—we’re trying not to suck.

“4. It’s Not Enough To Be Smart: It’s important to remember that regardless of how smart you are, VC negotiation is not just a matter of raw intelligence. Sure, it helps to have a few brain cells to understand the dynamics of a deal, but a lot is hidden away in the dark corners that you only ever learn by doing it. It’s also important to remember that the VCs do this for a living. Hopefully, you don’t (you’re building businesses for a living). You may be twice as smart as they are, but you’re still at a disadvantage. Try to even the playing field as much as you can.”

Dharmesh’s site, On Startups, is a great resource for entrepreneurs.