Steve Bayle has appeared in the blogosphere. He made an audacious entrance into my NewsGator Online Services custom search feed for “Brad Feld” where he asserted that I don’t know jack about naming things (he’s correct – my first company was creatively named Feld Technologies, proving Steve’s point).
I’ve been involved with two of Steve’s companies. The first was Mainspring which went public in July of 2000 and then was acquired by IBM. Softbank Technology Ventures and Flatiron Partners were investors and I sat on the strategic advisory board. Mainspring had a happy ending, but I didn’t have much to do with it as my involvement was light (but hopefully appreciated).
The second was Throughline which didn’t have a happy ending, but had some useful entrepreneurial lessons. Throughline was a classic seed investment. I knew and liked Steve. We sat down one day in NetGenesis’s office in Cambridge in 1998 and he walked me through his idea for a business that was a web-based broker for services that entrepreneurs needed (real estate, HR, technology services – that sort of stuff). He had a nice handcrafted PowerPoint presentation (yes – with more than six words per slide), a lot of passion and energy for the idea, credibility with me, and a partner who I liked (Laura Ring – who had previously been executive director at the Mass Telecom Council and had been involved in starting up the PWC High Tech Services Group in Boston). We spent some time talking about the idea over the next month and quickly decided to do a small seed investment ($500,000) to see if we had anything.
Shortly after the seed investment, we started working closely with Silicon Valley Bank on the idea. Their primary customer – entrepreneurial / venture funded companies – was our target and by 1998 everying was in high energy mode in the run up to the Internet bubble. They quickly invested (I can’t remember whether it was just equity or equity and debt) and we started testing out our thesis. We did a lot of seed stage stuff (small office, small team, lots of testing the ideas, prototype of the site, building relationships, and defining the business more clearly). We then started looking for a co-investor to build out a first round (Series A financing).
I recall that the idea landed with a huge thud. We got a lot of feedback – much of it positioned as “nice idea guys, but the market is too small and it’s not a venture-financeable concept”. In hindsight we were probably lucky – by mid-1999 / early-2000 VCs were flinging money at anything and Throughline would have easily been funded with much too much money. I don’t remember too many difficult conversations as Steve and Laura were pros about the situation. We came to the conclusion that it didn’t make sense to go forward and sold the assets of the business to SVB. I have no idea what came of it from there.
An important lesson for me from Throughline is that not all seed deals should go forward. We invested (and lost) $500k. I don’t regret this one bit – I did it with an entrepreneur who I respect and trust – we tried – and we cut our losses early when we realized we didn’t have anything. I’ve lost other seed deals in my career, but all it takes is one home run (e.g. ServiceMetrics – a seed investment story for another day titled “How to turn a $500k seed / $5m total investment into $200m in 18 months”) to make up for several hundred seed deals.
I expect Steve will be full of good entrepreneurial tales – of both good and bad. Welcome Steve to Blogland.
Now that I’ve chowed down a bunch of Stephen Frey books, if there’s one you read, it should be The Legacy. It combines light Wall Street stuff with a giant JFK / government / mafia conspiracy. It’s well written, lots of twists, turns, unexpected surprises and – yes – a happy ending.
In contrast, The Day Trader sucked. I didn’t finish it, but I’m going to count it as read since I bailed more then half way through.
Earlier this week, one of my companies – EYT – announced that it had merged with ePartners. My close friend and collegue Howard Diamond was the driver of this deal and is now executive chairman of ePartners. Howard was previously the executive chairman of Rebar / Corporate Software – an investment of mine that was acquired by Level 3 in 2002.
This is a big deal for us since the resulting company – to be called ePartners – is the largest Microsoft Business Solutions (MBS) provider in North America. ePartners has over 400 employees, including 220 solution consultants, 29 offices, and is headquartered in Seattle. For those of you that don’t know anything about MBS, it’s the division of Microsoft that was formed through their acquisitions of Great Plains and Navision over the past few years and includes the Microsoft CRM product line.
MBS has recently come under scrutiny as it has underperformed expectations. Also, the Oracle / PeopleSoft DOJ trial has revealed that Microsoft considered making an investment in Peoplesoft as a potential white knight as well as considered acquiring SAP in an attempt to further its foothold in the ERP business.
While the Microsoft – Peoplesoft investment and the Microsoft – SAP acquisition are highly unlikely, Microsoft is clearly committed to MBS and the ERP market. While VC’s have not historically funded companies that provide system integration and consulting services for Microsoft’s products, there have been several companies funded in the MBS universe. The merger of EYT and ePartners combines two of them and results in the largest and best financed in North America.
I’m expecially excited about this since my history with Microsoft Business Solutions products (specifically Great Plains) dates back to 1994 when AmeriData – which had acquired my first company (Feld Technologies) – became a major Great Plains integrator. I was also on the board of SBT Accounting Systems from 1994 – 2000 which competed with Great Plains and was almost acquired by them in 2001 before being acquired by Computer Associates. Finally, my partner Heidi Roizen was on the Great Plains board from 1998 – 2002 and was very involved in the Microsoft acquisition of Great Plains. I orginally invested in EYT in 2000 and – while it has been a twisty road through the bursting of the Internet bubble, I’m very pleased with where we are today and proud of the people that have helped get us here.
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:
- Investors will almost always require that the company set aside additional shares for a stock option plan for employees. Investors will assume and require that these shares are set aside prior to the investment, thus diluting the founders.
- If there are multiple investors, they must be treated as one in the calculations above.
- To determine an individual ownership fraction, divide the individual investment by the post-money valuation for the entire deal.
- For a subsequent financing, to keep the share price flat the pre-money valuation of the new investment must be the same as the post-money valuation of the prior investment.
- For early-stage companies, venture investors are normally interested in owning a particular fraction of the company for an appropriate investment. The valuation is actually a derived number and does not really mean anything about what the business is “worth.”
I just got my first RSS Feed Ad via my eWEEK Technology News Feed.
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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.