Archive for March, 2011

March 5, 2011

Valuation, Lean Startup and Uncertainty

Diagram of the typical financing cycle for a s...Image via WikipediaAlbert Wenger has an interesting post about Valuation of startup companies and the main challenge in valuation of company on the exponential growth path. I could not agree more, this is the same problem that I have highlighted several times with my posts on Power Law and the failure of extrapolations and the Normal Probability Distribution. Albert points out a practical challenge from both sides of the venture table, as an entrepreneur you are not sure how long you need the funding to hit that inflection point and as an investor you are struggling to make sure you are not paying too much for a business that might not pan out. The solution is actually “common sense” but of course “Common Sense” is never “Common Practice”, I digress, the solution is to get to a sustainable model where your revenues/cash flows funds the company… you grow your customers base, revenue and cash position… Problem solved! Really, is it that simple, YES it is. 
StartupImage via Wikipedia

Of course all those companies that are building their business model on the Hope that they will draw enough crowd onto their site where in they can monetize the traffic with ads are working on a loosing premise. I know Huffington Post just got paid etc but there are so many content aggregators why only Huff Post got bought out? why not the others? once again the theory of the power law works here. So my take on this is very simple, entrepreneurs should focus on creating value by solving some problem for which someone is willing to pay a price for. If the universe of those willing to pay are price is HUGE then you are onto something.

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March 2, 2011

Project Genesis

Coat of arms of IcelandImage via Wikipedia

Project Genesis is an initiative to establish a $50 million venture capital fund in Iceland focusing on innovation in specific field where there is a unique social, biological, ecological, environmental and geographical advantage. For example, Icelanders are ranked 3rd in the world for life expectancy by the United Nations and Iceland employs renewable energy to power the entire country. Both we feel are social, ecological, environmental and geographical advantages of Iceland.
Our initiative is to invest in the ideas, leaders, people and teams by finding entreprenuers who are trying to create valuable solutions for the Global market from these unique advantages inherent in the country. Iceland is a fertile ground for venture investments. The advent of the financial crisis has created several opportunities for investment in Iceland. There has been no point in time than now where Icelanders have had to reinvent themselves more rapidly and broadly, this we feel provides a unique opportunity as well as timing. With the young demography and the affinity of icelanders to live in this island, we believe will motivate the population to find new ways to solve issues that are global in nature.
History has been good to Iceland, Icelanders transformed themselves from one of the poorest nations in the Nordic region to one of the richest in less than half a century. They acheived this by utilizing the resources, namely fish, geothermal and hydro energy that were available in their natural environment and through innovation. If we extrapolate this to the new Iceland which has one of the best infrastructures in the world, abundant renewable energy and highly educated workforce, what can be created can be as broad as our imagination.
The fund will focus on all areas where there is a unique advantage in Iceland. The goal of the fund will be to look at the next phase of technology, information and renewable energy usage, expanding the value chain of renewable energy usage. All products and services produced in Iceland use renewable energy sources, which means all of these end-products are Carbon Neutral. We believe that there is demand for products and services that are produced using renewable energy and this trend is going to grow. The energy utilized in Iceland to make these products and services are one of the cheapest in the world. In addition, energy remains one of the most volatile factor inputs in the production process since oil became the energy source of choice. We believe that products and services produced from renewable sources will have stable factor cost and thereby enabling pricing that is corresponding to the value of the product and not driven by the price of fossible based fuels.
The typical timeframe of investment for the fund is 7 years. The goal of the fund would be to provide active mentoring and leadership to its portfolio companies in the areas of business strategy, internationalization, product and service development, branding, marketing, legal, financial and operational process development. The fund will run an active 3 month long business accelerator centre for entrepreneurs. The accelerator will be very selective, top 0.5% of business plans will be accepted into the program. These companies get up to $18,000 in seed funding, three months of intensive top-notch mentorship, and the chance to pitch to angel investors and venture capitalists at the end of the program. The fund will be given a 6% equity by the companies that are selected by the accelerator program. The accelerator will solicit the support of successful entrepreneurs across the globe and bring a world class mentorship program to Iceland where typical startup and business development challenges are solved faster by tapping the vast resource of knowledgable Zen Masters of business. The intention of active mentorship is to enable entrepreneurs do more things faster. We believe that with the current state of technology and communication, world class companies can be built faster. Facebook and Twitter did not exist 10 years back, Google did not exist 15 years back. We rest our case!
The fund would provide returns to its limited partners in 3 ways, (i) Initial Public Offering (IPO) of its portfolio companies, (ii) portfolio company acquired at a higher valuation by another company and/or (iii) the portfolio company transforms into a well run dividend paying company. Venture Capital funds have a unique investment return profile, our fund will aspire to multiply the investment in our portfolio companies many times over and our philiosphy of investing is not anchored on exit. We believe in patient capital as world class products and services take time to build but we believe we can squeeze more juice out of this time with the right platform.

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March 2, 2011

Resurrecting the blog – Yet Again – Clara will be the focus of this post

I took a long break from writing… I don’t know why I do that because there are many topics of interest that I am constantly battling in my head and writing clears that up.

For those of you who have never followed what I have been doing, We invested in an awesome team in Iceland, the company is in the business of Text Analysis and Language Processing and Visualization. I want to document the history of how this company was transformed in a very short period of time with our participation and capital.

Clara, was a promising startup in the house of idea the incubator funded by the University of Iceland and the Government of Iceland. They had boot strapped their way with grants and charity to develop a language processing engine that understood Icelandic. I started working with them at the end of 2009, based on my input the team pivoted… updated their business plan, launched a new product, got some paying customers.

We closed a round of early stage funding their working capital… now the team has grown from 6 to 11. They have added 65+ customers and have started on a journey to setup an office in the Silicon Valley and are close to being cash flow positive. All this in the last 10 months! whoever said startups take time to grow!

This experience planted a seed idea in my head to launch a Venture Capital Fund coupled with a business accelerator program. I have been a student of some of the successful Venture Capitalists out there like Fred Wilson, Brad Feld, Mark Suster to name a few. I have been a avid reader of every word they have been writing… it has been a fascinating journey. I even took the courage to meet Fred Wilson when I was in NYC, he was gracious enough to meet with me and share some of his insights.

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