Category: Entrepreneurship

After reading Michael Lewis’ latest book, The Big Short, this weekend it got me thinking more about junk bonds. Michael Lewis referenced his first book, Liar’s Poker, which chronicles the rise of the junk bond industry at Solomon Brothers, several times in the new book. Ted Turner’s autobiography, Call me Ted, talks about how junk bonds were the only way he could finance the growth of his empire without giving up control of his namesake business.

Why don’t we see the equivalent of a junk bond industry for startups?

Financing for startups typically revolves around angel investors (three Fs – friends, family, and fools) and venture capitalists with the occasional bootstrapper thrown in. I don’t see junk bonds working for pre-revenue companies as bonds are predicated on the ability to pay interest as well repay the whole amount at maturity. But for startups that have moved from the seed stage to early or growth stage (e.g. at least $1 million in revenue), knowing the gross margins for software and SaaS companies are typically north of 70%, there should be opportunity for junk bonds (e.g. high interest loans) to finance growth. The bonds would be senior debt such that failure to repay or refinance the bonds would potentially turn ownership of the company over to the bond holders, there’s sufficient collateral in the form of company equity to back the financing.

Here are a few reasons why we don’t see a junk bond market for startups:

• Reporting, auditing, and other controls for startups are typically weak giving little transparency to potential financiers
• Many technology startups that reach $1 million in revenue already have investors and are on the investor train (e.g. once you raise institutional money, and things are going well, you’re going to likely raise more and more rounds of equity financing)
• There are so few startups looking for this type of financing that connecting the buyers and sellers would be prohibitively expensive

We’re not going to see a junk bond market for startups anytime soon but I believe there’s a need in the market for profitable, fast-growing startups to be able raise debt financing without collateral (e.g. real estate or physical assets) backing it up.

What do you think? Is there a market for startups to do debt financing with asset-lite businesses?

Entrepreneurs are typically half-glass-full types of people and I’m no exception. I have much to be thankful for and Thanksgiving is a great time to reflect. One of the best parts of being an entrepreneur is that there are so many opportunities everywhere you look.

I’ve mentioned most of these before but it is important to give thanks as a company. Here are a few of the things we do to give thanks and celebrate our success:

• Thanksgiving pot-luck lunch the day before Thanksgiving
• Weekly catered lunches (free food Fridays)
• Monthly heroes ($100 cash plus a cool lawn ornament for the month)
• Quarterly celebrations (e.g. Braves game, bowling, Piedmont Park picnic, etc)
• Quarterly community service projects to give back (e.g. Junior Achievement, clean a park, etc)

I think it’s important to give thanks and we’ve incorporated it into our corporate culture.

Several EO Accelerator participants (accelerants) have asked me this year about setting up a board of advisors. In addition, the board of advisors topic was brought up again a couple days ago in my post What Should I Write About? I view advisors, both formal and informal, as very important even though I’ve employed informal advisors much more than formal advisors. I’ve also been an advisor to several companies.

Here are my thoughts on a formal board of advisors for startups:

• Advisors should fill gaps in expertise (e.g. sales, marketing, services, support, operations, engineering, finance, etc) and/or be able to make key introductions to customers, partners, and investors
• Advisors should meet quarterly or bi-annually as a group over a nice dinner as well as individually at least once between meetings
• Advisors getting to spend time with other high-quality advisors, in addition to the entrepreneur(s), is a big part of the advisors’ experience
• Advisors should be asked to commit for one or two years, but not typically more as the needs of the startup change over time
• Advisors should not be compensated with cash but rather with equity (e.g. .1% – 1% depending on what they bring to the table with the norm being closer to .25% of the startup) along with the opportunity to invest in each round
• Advisors that are also investors are ideal as they have more skin in the game

My recommendation is to seriously consider advisors and know that it is like anything where the more you put into it the more you’ll get out of it.

What else? What other advice do you have regarding startups and a board of advisors?

One of the goals of the most recent quantitative easing strategy (QE2) is to replace investment assets in banks, like T-Bills that make interest, with cash that doesn’t make interest. With cash on hand that isn’t income producing, banks are more likely to loan the money to businesses or consumers, as well as increase the money supply through the money multiplier effect. For technology startups, lines of credit and bank loans are especially difficult as almost all loans are done against hard assets like real estate or equipment. Even the recent increased guarantees by the SBA still don’t account for knowledge industries that are asset-lite.

Here are a few items startups should keep in mind when thinking about a bank line of credit or loan:

• Typically banks will do a line of credit for 75% of current accounts receivable (meaning, if you have $120,000 owed to your business, with $100,000 current and $20,000 overdue, a bank will loan you $75,000)
• Certain banks like Silicon Valley Bank and Square 1 Bank specialize in banking venture-backed startups and provide sizable bank loans based on the reputation of the venture investors (but the VCs don’t co-sign on the loan) as well as loans against a small percentage of recurring revenue
• A new class of investor that provides a loan in exchange for a percentage of future revenue is emerging (see TechCrunch’s article on RevenueLoan)

My recommendation is to build a relationship with a community bank or startup-focused bank, establish a line of credit, and know that the best time to ask for money is when you don’t need it.

Over the past 550 posts I’ve covered a ton of different topics and had over 64,000 page views since January 2009. Most of my posts are related to these categories:

• Entrepreneurship
• Sales and marketing
• Corporate culture
• Software-as-a-service
• Product management
• Operations

I love writing about these topics and plan on continuing to do so. My question is this: what should I write about? What are some specific questions or thoughts you’d like to talk more about related to these categories or others? Thanks for reading and please let me know what I can do to improve this blog.

Earlier today I was talking to an entrepreneur that was thinking about raising money. His technology startup is near break-even and he sees a market opportunity to accelerate growth. We talked for a bit about his sales and marketing progress before jumping into fundraising. After I asked about pre-money valuation, current revenue run rate, and amount he wanted to raise it was clear he hadn’t thought through the differences between raising money from angel investors vs. venture capitalists. Here’s what I offered up:

• Angels are typically more hands-off while VCs typically take a seat on the board and are hands-on.
• Angels are typically happy with a 3-5x return while VCs focus on results with 8-10x returns.
• Angels are typically satisfied with dividends providing some liquidity while VCs want profits reinvested to maximize growth.
• Angels typically don’t make big investments while VCs can provide significantly more equity.
• Angels typically don’t have as many strings attached with the investment (e.g. anti-dilution, liquidity preferences, etc) compared to VCs.
• Angels typically want to invest an amount they’re comfortable with (say $50K) without budgeting for follow-on investment. VCs however, start with an amount (say $1M) and want to put more money to work in the same company in later rounds (e.g. plan for several rounds of financing with the VC route)

These were most of the main points that I thought he should consider. My recommendation for entrepreneurs looking to raise money is to truly understand the differences between typical angel and VC investments.

What else? What other differences between angel investors and VCs would you note?