Amy and I saw a double feature tonight. Our place in Alaska is in a small town (Homer) and we have one movie theater that shows two different movies a day (one at 3 and 6, one at 9). The two movies change every Friday so if we wanted to catch the ones from this week, tonight was the night.
6pm was Harry Potter and the Prisoner of Azkaban. It was what you’d expect.
9pm was The Chronicles of Riddick. It was an awesome bad movie. Vin Diesel was fantastic – I want to be him when I grow up.
I’m pleased to announce that the Boulder Philharmonic Orchestra ended their fiscal year in positive net worth territory for the first time since 1996. The Boulder Daily Camera just ran a nice article about how it overcame its debt.
Why should you care, you ask?
My wife Amy and I pick one major non-profit to have as our “major initiative” for the year. We give to a wide range of organizations – both money and time – but pick one to “go over the top” with each year. Last year we gave a major “seed gift” to help jump start the The Community Trust of the Community Foundation Serving Boulder County.
This year we decided to help the “new Boulder Philharmonic” get solidly on its feet after a near death experience in the hands of the now defunct Peak Arts. Mission accomplished! It feels great to be able to say this in today’s era of declining financing for arts organizations.
Fred Wilson wrote a useful post on valuation today. It reminded me of a document I had Dave Jilk write when he was doing some work for me. I decided to write this “bladon” (Blog Add-on) post – inspired by Fred. Please read Fred’s post first – it lays the groundwork for why VCs do things this way.
I’ve found that even sophisticated entrepreneurs didn’t necessary grasp how valuation math (or “deal algebra”) worked. VCs talk about pre-money, post-money, and share price as though these were universally defined terms that the average American voter would understand. To insure everyone is talking about the same thing, I started passing out this document. Recognize that this is about the math behind the calculations, not the philosophy of valuation (which Fred’s blog addresses).
In a venture capital investment, the terminology and mathematics can seem confusing at first, particularly given that the investors are able to calculate the relevant numbers in their heads. The concepts are actually not complicated, and with a few simple algebraic tips you will be able to do the math in your head as well, leading to more effective negotiation.
The essence of a venture capital transaction is that the investor puts cash in the company in return for newly-issued shares in the company. The state of affairs immediately prior to the transaction is referred to as “pre-money,” and immediately after the transaction “post-money.”
The value of the whole company before the transaction, called the “pre-money valuation” (and similar to a market capitalization) is just the share price times the number of shares outstanding before the transaction:
Pre-money Valuation = Share Price * Pre-money Shares
The total amount invested is just the share price times the number of shares purchased:
Investment = Share Price * Shares Issued
Unlike when you buy publicly traded shares, however, the shares purchased in a venture capital investment are new shares, leading to a change in the number of shares outstanding:
Post-money Shares = Pre-money Shares + Shares Issued
And because the only immediate effect of the transaction on the value of the company is to increase the amount of cash it has, the valuation after the transaction is just increased by the amount of that cash:
Post-money Valuation = Pre-money Valuation + Investment
The portion of the company owned by the investors after the deal will just be the number of shares they purchased divided by the total shares outstanding:
Fraction Owned = Shares Issued /Post-money Shares
Using some simple algebra (substitute from the earlier equations), we find out that there is another way to view this:
Fraction Owned = Investment / Post-money Valuation = Investment / (Pre-money Valuation + Investment)
So when an investor proposes an investment of $2 million at $3 million “pre” (short for premoney valuation), this means that the investors will own 40% of the company after the transaction:
$2m / ($3m + $2m) = 2/5 = 40%
And if you have 1.5 million shares outstanding prior to the investment, you can calculate the price per share:
Share Price = Pre-money Valuation / Pre-money Shares = $3m / 1.5m = $2.00
As well as the number of shares issued:
Shares Issued = Investment /Share Price = $2m / $2.00 = 1m
The key trick to remember is that share price is easier to calculate with pre-money numbers, and fraction of ownership is easier to calculate with post-money numbers; you switch back and forth by adding or subtracting the amount of the investment. It is also important to note that the share price is the same before and after the deal, which can also be shown with some simple algebraic manipulations.
A few other points to note:
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I guess it’s time to create an Outlook rule to junk anything with ADV: in it.
About a year ago, Greg Prow (one of my partners) introduced me to a guy named Ben Casnocha. He said something to the effect of “Hey Brad – next time you are in California – you’ve got to meet this kid – he makes me think of what you must have been like in high school.”
A few weeks later I hooked up with Ben late on a Monday. I was pretty fried from our normal partner meeting, but immediately engaged when we sat down in a conference room and started talking. I thought I was meeting Ben but his dad and the president of his company – Comcate – were there. Fortunately, the conversation focused on Ben and what he was up to so we spent a good hour getting to know each other.
I walked away intrigued and impressed. I started getting involved in computers when I was a teenager (my launching off point was the Apple II with an Integer card that I got for my bar mitzvah) and my dad had hooked me up with patients of his that were “computer people” by the time I was 15. Ben made me think of this during our meeting and I fondly recalled several of my early mentors like Gene Scott and Chris / Helena Aves. I also remembered plenty of bad experiences and my complete naivete (for example, writing a letter to Stephen Jobs and copying everyone I could think of about how crappy the Lisa / Mac development environment was and how useless the Mac Developers program was, while thinking that anyone would care what an 18 year old thought who wasn’t clueful enough to know that it was “Steve Jobs”).
I was energized by Ben’s passion for the company that he had created. Comcate was a credible business, with real customers, and – while it was living off of angel financing – was gradually generating real revenue. Ben carried himself extremely well for a 16 year (maybe he was even 15), was articulate, and was willing to engage in a real conversation. Ben represented his company well, did a nice job of letting the meeting flow (while clearly showing maturity beyond his years), and even asked for the sale (“Are you willing to keep talking to me and provide on-going advice, mentoring, and introductions?”). I answered with a resounding yes and early the next day fired off a series of email intros to other friends of mine who had accomplished significant entrepreneurial feats at a young age.
Over the next couple of weeks, my meeting with Ben rattled around in my brain. Something bothered me. After talking to a few of the folks that I hooked Ben up with, a consistent theme came back. Ben was a neat guy, had accomplished a remarkable amount of business stuff for someone his age, and had strong opinions. Some of them were the strong opinions of a 16 years – granted – a 16 year old that already had plenty of miles on him in the business world, but were still “unseasoned by life” (yeah – I was 16 once – and I was pretty clueless about a lot of things. I’m 38 now and am still clueless about a lot of things). I realized I didn’t know much about “the non-business Ben” and – given that I lived over 1500 miles away and was unlikely to have much more than an email relationship with him, I didn’t feel it was my place to provide critical feedback to him beyond the domain(s) that he engaged me in.
So – I smiled yesterday when I got a note from Ben telling me that he was beta testing a personal blog. The part of me that was concerned – but didn’t really know why – and didn’t feel like I had any place to comment freely since I didn’t really know Ben – now had a chance – through his blog – to understand him better and learn more about him.
Ben – go for it!
Seth Godin is magnificent and his new book – Free Prize Inside: The Next Big Marketing Idea – is a winner.
This book takes you on a romp through the way to help you understand how to make your product or service remarkable. I’ve often been (mis)quoted saying things like “marketing is useless” when in fact what I mean is “the way most people do marketing is useless and a waste of money.” Seth has always approached marketing in a revolutionary way under his thesis that everything we do is part of marketing. If you aren’t a Seth Godin fan, try his blog and his books.
In addition to his rants on marketing, Seth – like me – has strong views on PowerPoint. He’s written an Ebook called Really Bad PowerPoint that you can buy on Amazon or download free if you’ve bought Free Prize Inside (using the honors system).
As your Free Prize Inside this post (and part of my continuing quest to make the world a safer place for venture capitalists), following is an excerpt from Free Prize Inside (with Seth’s permission, of course). It’s called Special Bonus Tactic: Avoid Really Bad PowerPoint.
“…
PowerPoint was developed by engineers as a tool to help them communicate with the marketing department – and vice versa. It’s a remarkable tool because it allows for very dense verbal communication. Yes, you could send a memo, but no one reads anymore. … PowerPoint could be the most powerful tool on your computer. But it’s not. Countless soft innovations fail because their champions use PowerPoint the way Microsoft wants them to, instead of the right way.
Bullets Are for the NRA
Here are the five rules you need to remember to create amazing PowerPoint presentations:
1. No more than six words on a slide. EVER. There is no presentation so complex that this rule needs to be broken.
2. No cheesy images. Use professional stock photo images.
3. No dissolves, spins or other transitions.
4. Sound effects can be used a few times per presentation, but never use the sound effects that are built into the program.
5. Don’t hand out printouts of your slides. They don’t work without you there.
…”
Go ahead – just try to follow rule #1. Thought provoking, isn’t it? Get the book – read it – and make something happen. It’s worth it.
In my attempt to read all of Stephen Frey’s books in record time and subsequently rate an entry in Guiness Book of World Records, I read The Inner Sanctum today.
Not so good. Don’t bother. Enough said.
There has been some buzz over the last two weeks about VC investments in RSS-related companies including our recent investment in NewsGator.
One company that was overlooked is MessageCast.. MessageCast was founded in late 2001 by Royal Farros, David Hodson, and Mike Rubin. My partner – Heidi Roizen – provided the seed investment (Heidi and Royal had previously worked together for a long time at T/Maker – the company that brought us the wonderful invention of “clickart”.
MessageCast provides a platform for publishers to provide their content via IM technologies – specifically MSN Alerts. Suddenly, instead of publishing via email, content providers can cause an MSN Alert to appear on your screen. This – of course – is only opt-in – so you (the user) have complete control (and LiveMessage is completely CAN-SPAM compliant).
“Why should the RSS world care” you ask? MessageCast is in beta on their MessageCast Syndication Edition for RSS publishers. To try it – if you are an MSN Messenger user – simply click on my LiveMessage link right here or on the top right side of my blog under Syndicate Me.
Now – MessageCast won’t be a replacement for your RSS reader (hopefully it’s NewsGator or NGOS Web / Mobile / POP / Media Center Edition). Instead, you’ll use MessageCast for your urgent feeds – the one’s you want to know about the minute they are posted. MessageCast is provided to the publisher as a service – no software is required and it takes less then five minutes to configure for an RSS feed.
Give it a try and give me feedback on what you think.
The Republican Noise Machine : Right Wing Media and How it Corrupts Democracy was a depressing book. I first noticed it from a post by Jerry Colonna. I had it shipped up to my house in Alaska where I settled in for a long read yesterday after my run.
In some ways, it seemed appropriate to read this over the fourth of July weekend. I read a bunch of mental floss on Friday and decided I needed to chew on something serious. I’m back to mental floss…
Until recently I was very apolitical. For whatever reason, I just didn’t engage – I felt that things worked themselves out over time and – rather than get wrapped up in the endless political debate – I figured I’d focus on issues that I cared about and support them, independent of their political affiliation. As a result, I told whoever asked that my political affiliation was “my own little party of one.”
A couple of years ago, I stuck my toe publicly into the political scene in Colorado. A close friend of mine – Jared Polis – decided to run for the Colorado State Board of Education (he won and is now the chairman). Jared is an unabashed democrat and has become a strong force in the otherwise very conservative state of Colorado. Several friends were running for office in the 2002 election cycle as democrats and I decided to get more actively involved. Everyone (except Jared) lost and – in addition to being bummed out by the candidates that were elected – I was disgusted by the way both parties acted near the end of the election cycle. I remember telling my wife “that’s it – I give up – I’m done with organized politics” (of course, that lasted about a week).
The Republican Noise Machine had me sitting in my chair with my mouth hanging open. Brock – a former right-wing insider – has written an incredibly substantive book that tells the story of how the GOP has systematically co-opted the media over the last few decades – starting wtih Nixon and rolling forward to today. This is not a “balanced book” (“balanced view” being one of the fallacies that Brock does a superb job of demolishing) – Brock is unapologetic as he tells his story.
It’s quite amazing how organized, effective, and ultimately successful the Republican Right has been. I’ve experienced this directly in Colorado. A year ago, JB Holston called me and told me about the Independence Institute, a conservative Colorado “think tank” that I was vaguely familiar with. While the Independence Institute isn’t mentioned in Brock’s book, it’s equivalent to many of the conservative “think tanks” that Brock discusses. JB suggested that Colorado needed a “progressive alternative”. I agreed and helped rally a crew of folks, including Jared and Rollie Heath (who lost his run for governer against the incumbent Bill Ownes in 2002), to help start the Rocky Mountain Progressive Network. It’s a year later and RMPN has done a great job of counterbalancing the Republican Right in Colorado. My experience watching from the background (and learning about the antics – expecially those in the media – by organizations like the Independence Institute) made the story Brock tells even more poignant.
This is a powerful book for anyone that is open minded about the political dynamics in our country. If you are conservative, read it to get an ex-conservative insider’s view on what is going on. If you are progressive or liberal, read it to get a much deeper historical understand of how things played out so that you can be more effective contending with them in the future. If you aren’t open minded, don’t bother – it won’t matter to you anyway.