May 11, 2012
This is a follow up post to “How to fix any business“. I am a big fan of VCs – Value Creators. I have been following, reading and absorbing everything successful VCs do for the past 3 years. I have learnt a lot and I continue to learn a lot from this very smart, hyper networked, visionary group. I am not that smart or have the track record or success to call my self a Venture Capitalist but I call myself a Value Creator (do you see the trend I keep repeating Value Creator until it becomes the definition of a VC ). There is a lot of perspectives and reactions in the blogsphere to what Fred Wilson said, Fred is a very very smart guy… in case you did not know and I have taken him as my virtual mentor since I started on this journey to make mission in life is to help and serve Entrepreneurs, I am continuing the figure out the economic business model for myself part that is for another post. Fred suggested alternatives to the traditional growth of Venture Capital Fund is nicely summarized here:
Fred’s view of where VC is going are:
- Given all the new pools of funding, he said, it doesn’t make sense for VCs to continue aggregating capital. And considering the industry’s inability to generate returns on more than half of the current investment in venture capital, he added that the allocation aspect is another area ripe for rethinking.
- Still, he continued, VCs, can keep on adding value as board members, advisors and resources on exits and governance.
- Going forward, VCs have a few options on the table, including becoming more selective, shrinking, halting investment of instutional capital or taking more equity for the governance and advisor services they provide, Wilson said.
- But one of the more compelling ideas he floated was building a business on top of crowdfunding.
“If these crowdfunding markets really do develop into these vibrant markets… maybe the answer is to leverage that capital and do something interesting there as opposed to going out and raising money from the institutions,” he said….And, as a last resort? Quipped Wilson, “We can just retire.”
Successful VCs will tell you that, they are really lucky but one needs to be smart and in the right field to be lucky. IMHO, the biggest Value Add VCs bring to their portfolio companies besides negotiating a value for the company by buying shares in the company with real money is their wisdom, network relationships and connections. They open doors for them in terms of business deals, customers, exits and as being mentors they provide the coaching the team needs. As fiduciaries and Board members they ensure that proper governance frameworks are in place to build sustainable companies. In addition to all that they have an opinion on the direction of where the market is going so they try to ensure their companies have aligned their sails to make the winds of change work for them. Crowd funding solves only one of those problems i.e the value determining and money part, it is an important part but all the other things that follow are far more important and still needs to be done. I am not sure who leads a crowdfunding round for a company using a crowdfunding platform, hypothetically it should not matter but for those of us who have raised money, gone through funding rounds it is a process and it takes time and it is not that simple. I don’t believe we know all the challenges in front of us in terms of Crowdfunding but VCs should play a very major role in doing the Value Add to CrowdFunding. My suspicion is that they most definitely will do. Here is a good talk by Mark Suster about Entrepreneurship and Venture Capital, I like his disruption story and making it happen.
May 10, 2012
Fred Wilson has a post with the title “Death to the Use of Death in a Title” which is explaining the tweeting, blogging and popular media picking on his #Rethink VC talk. GigaOm covers this in the article “Fred Wilson: What Crowdfunding means for VC business” Fred is challenging the VC business to rethink the business model. He offers some insights and discussions around what he thinks is broken and how to fix it. The conclusion or symptom of the VC business being broken is based on the report published by Kauffman Association. I dont believe the VC business is broken, the values, principles and the dogma the practioners have created in the VC business is broken. I also believe that the metrics to measure success of the VC business is broken, actually if we think about it the report and the popular media focuses so much on a single stakeholder i.e the Limited Partner or the Returns to the Limited Partner. I am not so sure if that is the right model or metric. I really believe we need to have metrics that measures and benchmarks all the elements or stakeholders. Lets think about the stakeholders of any business:
We consistently focus only on 1. Owners/Shareholders if that is the only metrics that matter, then we have a wrong paradigm or an unsustainable system. VC funds are businesses and they need to get sustainable just like any other business. I think the fundamental problem with us humans is that we let entropy get the better of us. What I mean is based on the work of Dr.Scott Peck and Dr.Steven Covey, Scott Peck in his very popular book “The Road less travelled”, talks about Love – “Love is the will to extend one’s self for the purpose of nurturing one’s own or another’s spiritual growth… Love is as love does. Love is an act of will — namely, both an intention and an action. Will also implies choice. We do not have to love. We choose to love.” He goes on to say the antithesis to love is laziness, all of us are lazy, not the kind that we typically associate with, but according to Dr.Peck Laziness is the unwillingness to extend oneself to the betterment of the self or another’s spiritual growth. If all of us extend ourselves to service every stakeholder in our relationships, we will fix the problems in our world. The same philosophy works for the VC business as well. The big challenge VC’s face is the ever increasing pool of money that they continuously deploy or need to deploy, I think that notion has to be rethought. Can you make a fund sustainable? theoretically I think it can, I am not that smart to figure out how to fix this problem. What if a fund investing in a portfolio of companies made all the companies sustainable to a point where they consistently keep increasing their book value… is’nt that what Entrepreneurs do or want to do? why cannot a fund do the same? why do we have to keep raising more and more capital to run the VC business? I don’t know enough about this to judge the players but I fundamentally don’t think this is impossible to do. The real emphasis that I want to make in support of the VC business is that, I have redefined the acronym VC – to me VC stands for Value Creator, as long as you are able to create value that creates a system that feeds itself you can make any system work. Sure there are challenges, it takes a lot of work, have to make a lot of sacrifices, it is full of pain but it is so worth it. I have written about the Why we do what we do… all VCs should do the same thing every entrepreneur needs to do, stand in front of the mirror and ask themselves “Why do I do what I do?“
I think for the first time in a long time all businesses are being faced with the challenge of dealing with competition and tectonic shifts in technology that disrupts traditional methods of measure, improving and servicing
owners stakeholders. VC business is not immune to this change we are seeing. I always go and listen to Bob Dylan’s
April 15, 2012
Haukur Gudjonsson has done a great review of the Startup Kids – A documentary about the startup life, it is in Icelandic.
I met with the founders of The Startup Kids Sesselja Vilhjalmsdottir and Vala Halldorsdottir, about a year back when they had just finished filming the documentary and were on the way to edit, amend and smoothen the rough edges of the film. I was very impressed with their spunk, here we have 2 girls, who decided to brave everything i.e apply for a EU grant, apply to Kickstarter, raise money to go do a documentary about Entrepreneurship and Startups. Actually, it is even more adventurous than that, they bought a one-way ticket to the US and made contacts and met all the new movers and shakers of Silicon Valley by hustling. The attribute that I wish every one should aspire to have, you want something you just work hard for it and go make it happen. There is no better way to define Entrepreneurship. The movie was professional, very inspiring, touched on all the cliches and the human side of being an entrepreneur, young kids raising millions of dollars in Venture Money, some loosing it all, others saying why they do what they do. The common theme through out the documentary is the passion they all hold onto to make their ideas come to life. It is not always about the ideas it is the people behind the ideas that matter. I have written a lot about teams here, here and here. I want to license this movie and make it a theme for Startup Iceland, because it touches on all the things that I have been writing about and saying since I started on this journey. In addition to that, I am committing to support Sessilja and Vala in anything that they want to do just like Ron Conway and Yuri Milner did with Y-Combinator, ‘cos I know they will figure it out and make it work… here is a trailer of the movie, “No one starts a band anymore, they all want to start a company…” Awesome start!
This is why I am betting on Iceland, despite all the people thinking what I am doing is crazy (I started investing in Iceland right after the collapse in 2009, yes, everyone said that I needed to go and check myself for insanity). I know there are more Sessiljas and Valas in Iceland just like there are more Gunnar Holmsteins and Jon Edvalds, the CEO and CTO of Clara. My passion is in finding these teams, mentoring them and creating value, I am a VC – Value Creator . I attended Seed Forum where one of the speaker was Truls Berg, a 3 time entrepreneur and one of the leaders in establishing an Angel Investor Network in Norway, defined VC this way. I will do a follow up post about Seed Forum, the pitches and what is not working for me with these pitches.
March 23, 2012
Muhammad Yunus in Houston (Photo credit: Wikipedia)
It is not law yet, but yesterday the Senate voted 73-26 in favor a bill that loosens SEC regulations in order to permit small businesses easier access to capital. I am not sure if “easier” is the term that I want to use, I think SEC rules were made a long time ago and we need to constantly review them and see if the underlying problems are being resolved through regulation. The capital raising rules as stipulated by SEC are draconian and demanding and is biased towards those with lots of resources and financial institutions (read money and BIG BANKS!). It is counter intuitive because those with money don’t really need to raise money, but the system is so biased towards those with resources that it is unbelievable. It was similar to the discussion Muhamed Yunus the founder of Grameen Bank in Bangladesh had when he approached a bank to request them to lend money to the poor people. The bank manager said poor people were not credit worthy, it sparked a fuse in Muhamed Yunus and he got the approval to start his own Micro Lending Bank. He found out that poor people are credit worthy and today that bank serves many million customers. If you want to read the story of transformation go read the story of Mohamed Yunus. If you make it harder then you just prevent those without resources to raise capital, i.e small business owners and entrepreneurs.
Forbes has an article that I thought was interesting, the article refers to Carl Esposti, founder of a consulting and market research firm Crowdsourcing.org, who is part of a group that has created a Crowdfunding Accreditation for Platform Standards (CAPS) program “to ensure a secure and reliable experience” for investors. I think the thought of something like this is important but I believe they are jumping the gun. I think more credible sources need to do the auditing of the platforms, should be interesting for the Big 4 Accounting Firms as this what they do, gives them a new product line, market and revenue stream. I need to reach out to my Partner friends in Deloitte, E&Y and PWC, if they have not already started thinking about this.
I am not even sure if we know all the challenges of CrowdFunding Platforms, I wrote about 3 big challenges, but I a pretty sure there are many. In my perspective are there going to be challenges ABSOLUTELY! will there be fraudsters? CLEARLY will people loose money? WITHOUT A DOUBT. These things should not stop us from trying to solve a problem and enable real, sincere and hardworking entrepreneurs from raising money. We don’t follow the rule of Napolean, we say everyone is Innocent until proven Guilty, should that not apply to Entrepreneurs too? No Entrepreneur I know wants to cheat and take money, well 1 maybe I digress… I think this is very interesting and precisely the reason I want to devote my energy towards solving this. If it was easy everyone would do it. I will be pushing the team at KarolinaFund.com to align with the movement and make sure they are trying this out in the local market and scale it globally.
March 21, 2012
I have written about Crowd Funding and how I want to throw my weight behind this. I think this is an important topic in the blog sphere and many lawyers are weighing in on the challenges. Here are a couple:
- Crowd Funding – A Critique for Entrepreneurs and Investors by Bill Payne, Angel Investor
- The Great Crowdfunding Train Wreck of 2013 by Antone Johnson, Business Lawyer
Both these articles are good starting points to think about the challenges of building a Crowd Funding Platform. Antone goes on to say that this whole Crowd Funding thing is going to end in a disaster and Bill is a little bit more balanced in his critique. I think both of them have valid points to make. Antone, actually starts with defining what he construes as the Crowd Funding a.k.a Crowd Investing platform, the definition is as he describes it is very similar to the ones in the IPO documentation definition of a company going public.
So, what are the main challenges in building a Crowd Funding Platform?
- Radical Information Asymmetry
- Valuing Early Stage Companies and evaluating the Risk-Reward can be done only by Experts
- Cost of Transparency and Accountability is too high for small early stage companies
I will go into the details of each one of the below.
- Radical Information Asymmetry: The Securities and Exchanges Commission (SEC) in the US or in any other country basically have a number of requirements that protect the small investor, i.e defining all the Risk factors, ensuring that companies wanting to raise money from the public are not fraudsters (the perception is that but there have been exceptions and I have always wondered how do they ensure that?) etc. The most important of all these requirements is that the Founders/Company Managers have more information about the company than the general public so they could potentially “hide” the detrimental information from the investor thereby “cheating” money away from the investor. On a theoretical level I agree with this information asymmetry, but practically I don’t think this is a problem because companies in their early stage don’t have any complications in their accounting or operational procedures, so it should be simple enough to basically share all the information that the company has and most early stage companies usually do.
- Valuing Early Stage companies is hard and measuring Risk-Reward ratio is best left to experts and experienced professionals. I could not disagree more with this assessment. Valuing companies in their early stage is very hard and I have written about it. That is the reason why private placement of securities i.e shares in a company require the investors to be accredited investors, the definition of who an accredited investor is weird, according to the federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
So basically if you are not rich or work for a Financial Institution you cannot be an investor! what a bunch of baloney! It really makes me mad they actually put Banks and Financial Institutions above Individual Investors. I have worked in a Bank and I know many of the people who make the investment decisions, I think an Entrepreneur would be more careful and weigh the options better than what I have seen done. So I don’t buy this argument. I also think there is too much emphasis given to “protecting” the small investor, I am not so sure that is such a problem. I also do not believe a person working in a financial institution has better understanding of Risk than a person who has nothing to do with finance. I am big fan of Nassim Taleb and Daniel Kahneman. Go and read their books if you really want to understand how we as humans just don’t have a good grasp of probability which in Financial jargon is Risk.
- Cost of Transparency and Accountability for smaller companies will be prohibitively high that would prevent them from actually going through the exercise of full disclosure.
I think the above 3 major hurdles are the biggest opportunities for a Crowd Funding Platform. I believe we can solve these above challenges, I believe too long we have waited to be told that you cannot do something because it is not good for you. I say lets jump into the pit and wrestle with the beast, no I do not mean your lawyer! I am going to devote time, effort and money to solve the above problems because I think there is a huge global opportunity. To start with I am committing to work with a team in Iceland… they have good ideas and are thinking about the right things but they need to solve the above problems before they can be a platform. Check them out Karolina Fund, the Star of the Crowd Funding movement ProFounder.com just shut shop and the reason they gave was the regulatory environment is not conducive for Crowd Funding Platforms, something to think about.
March 11, 2012
Just in time for SXSW, the House passed the JOBS (Jumpstart Our Business Startups) Act. This is a big step in the right direction, of course the US Senate has to pass this bill for President Obama to sign this into law. Venturebeat has the news about the bill here, and has a FAQ Page for Crowd Funding Bill go read it. The biggest advantage of this bill is the right to allow Startups and small companies to raise capital through Crowd Funding platforms like Kickstarter or Twitter. In addition, it reduces some of the restriction on the size of the shareholders needed to raise capital before going public etc I believe that is what is needed in Iceland. If a company really has the numbers and business case to really put themselves to the scrutiny of the crowd, I say that is true transparency and power. Check out the Infographics about Crowd Funding explosion around the world and here is a nice introduction to Crowd Funding.
I want to start a Crowd Funding Platform for Startups in Iceland, I think it will open up many options for Entrepreneurs and release them of the shackles of running behind investors or wanna be investors. I am positive that there are some legal restrictions on this in Iceland, I need to understand it. The biggest challenge I see many entrepreneurs face is the endless time spent on running to raise capital to build their business. The smart ones understand that Investors are not going to invest in them at an early stage so they straight go to their customers, but I think there is a middle ground. What if you need some capital to scale your business to acquire more customers or expand internationally? That capital raise path is full of mines… at least the way I see it. There are too many intermediaries and investors spend too much time trying to uncover what could go wrong. I think there is an opportunity to build a business to raise capital from the public as I am sure they are not making a lot of return on their investment sitting on bank deposits. What do you think? Do you think a Crowd Funding Model for raising capital for Startups and Entrepreneurial companies will work in Iceland?
Well, I told myself… there is only one way to find out. I am launching a signup page for Crowd Funding Platform. The design idea for the platform will be very similar to Kickstarter. Are you relentlessly resourceful? Can you pitch your business, show traction and attract an investor to get interested in your business in a 2 minute video? That is going to be the format, we will mashup the site sourcing from different applications that are already available like Crunchbase (a database of startup companies), Vimeo (video database platform) and WordPress (hosted domains) and a couple of resourceful teams that I have come to love as they execute so well. Lets Startup Iceland!