Mark Davis Archive

Since founding the Columbia Venture Community a few years back, I have watched the group continue to thrive due to the efforts of the talented leaders that have taken it upon themselves to drive the organization forward.   It has indeed come a long way. 

Initially the group was focused on creating a vibrant entrepreneurship community within the Columbia population.  Now that the group has become increasingly institutionalized in the fabric of the university culture, the organization is now working towards fulfilling its broader community responsibility:  helping to build the startup ecosystem in NYC.

I’m very proud to announce, a major step in that direction, our first NYC-wide startup career fair for job seekers from any university.  We’re also very excited to take this step in conjunction with the NYU Venture Community (founded by Chris Gimbert).

Special thanks to AOL for hosting the event and to the event’s organizers (especially Alex Horn, Dave Whittemore, Mike Brown, Nick Hurley and Chris Gimbert) whom have worked hard to pull this together.

If you’re a startup seeking talent or a student seeking a job this is the event for you.  The details of the event are below. 
Continue reading “Startup Career Fair in NYC on April 9th” »

This following column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.

The idea that angel investing typically declines in a recession is not new. The logic behind this is pretty basic – when the market crashes angels feel less wealthy and generally deploy less capital as a result.

When the market tanked last fall – the concern about the angel market (very reasonably) was one of the first to be raised by our industry pundits. For about ten weeks – this was the de facto conversation at venture events. The sky was falling and angel investing was expected to follow suit. Here’s what is interesting.

The New Hampshire Center for Venture Research recently reported that number of angel deals done in 2008 was down 2.9% in 2008.

To make sense of this number, we need to look at the run-rate of angel investments as that’s what is indicative about 2009. To this point, the run-rate for angel investments coming out of 2008 is probably a good bit lower than 3% down from 2007 given that the ‘wealth effect’ felt by investors was probably most prevalent in the last quarter of the year. To make a simplified adjustment, if you assume the entire decline in investing occurred in the fourth quarter, the implied run-rate would be 88% of the number of investments in 2007. In other words, the number of deals done by angel could be down by as much as 12%.

Looking at the big picture: The economy is in the midst of the worst financial crisis since the Great Depression, unemployment is sky rocketing, governments are pouring trillions of dollars into stimulus packages and angel investing is only down about 10%. That’s it? What happened to the belief that market for seed stage capital was going to completely dry up, leaving a wasteland of pre-revenue entrepreneurs to re-define the meaning of bootstrapping? It didn’t appear to happen – thank the big man.

The story, however, isn’t entirely rosy unfortunately. The pundits and the venture socialites were not wrong – the amount of angel capital deployed did declined by about 25%, meaning that entrepreneurs raised significantly smaller angel rounds.

If I had to choose, however, between fewer entrepreneurs getting fully funded or a lot of entrepreneurs raising less, I would vote for the latter. While fewer capitalized entrepreneurs nearly ensures that there will be fewer great new companies emerging, less capital per startup does not. While it will be more difficult for entrepreneurs to succeed with less capital, the best founders seem to have a knack for stretching a dollar as far as it needs to go. Furthermore in some instances under-capitalizing a startup can increase its chances, as limited resources can force entrepreneurs to operate more efficiently and position them to be more responsive to changes in their markets.

Startups are the fresh blood in our economic system. From a macro-perspective new companies drive growth, create jobs and increase the overall standard of living. They are always the team to be rooting for. As a result, the fact that angels are helping to keep the pipeline of new companies full is important news – news that beats expectations.

This following column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.

It is often said that the best entrepreneurs evolve, meaning that they successfully redefine their business models to match their changing understanding of their opportunities. For many, this means focusing on a new customer base, leveraging a new channel, repositioning a brand, restructuring pricing or making changes to the team.

The bigger plan, however, is sometimes destined not to succeed regardless of how much tweaking the entrepreneur does. Fundamental flaws in a business model can loom out of sight, only to be unearthed when a company first tests the waters by making its service available to customers. For example, in some cases, it might turn out that customers value something very different than what a company is offering. The entrepreneur’s intuition may have been off. Even worse, this situation can arise after an entrepreneur does the proper diligence. While an entrepreneur may have conducted surveys that demonstrated resounding customer interest in his service, customers may still not be motivated enough to act when it comes time to sign-up or pay. Yes, customers often can’t predict their own behavior.

Regardless of why an entrepreneur hits a dead-end, it is important for him to take a step back and look at the bigger picture. Doing so is a much more difficult proposition that one might expect, as the conventional wisdom told to entrepreneurs is that they must be perpetual contrarians; they must champion their ideas even when everyone around them, fellow entrepreneurs, investors, friends and even family, says that they’re crazy.

Well, the conventional wisdom isn’t that practical. Entrepreneurs do need to assume that most people won’t “get it”. Some, not all, of the other folks with relevant domain knowledge, however, should see the vision. If every knowledgeable colleague they know says that it’s a terrible idea, it probably is.

Another indicator of a fundamental business flaw comes in the form of an issue that the entrepreneur already knows about but has elected to ignore. It’s the question they admit to always getting stuck on, but have still somehow decided won’t hamper their progress. “Yeah that is a problem, but we’ll just work through that.” If you find yourself unable to answer a key question about your business it may be your Achilles Heel. It’s an optimist’s natural tendency to ignore underlying issues. If you find yourself unable to answer a key question, it’s time to take a step back and re-evaluate. Clear your head and reassess the practicality of your venture.

While other people’s opinions can be a helpful leading indicator, at the end of the day an entrepreneur needs to be the one to decide that his business plan is flawed. If the plan is in fact flawed, the sooner that he figures that out, the better.

This following column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.

When acquirers and the shareholders of a company come to an impasse on valuation based upon assumptions about future performance, the pricing gap is sometimes bridged through an earn-out. In an earn-out, the buyer agrees to pay the current shareholders additional compensation as pre-determined future operating metrics are achieved.

For example, if shareholders expect sales to increase next year and the acquirer doesn’t, the acquirer might agree to pay more for the company in the future if sales do in fact increase. Doing so enables the acquirer to protect itself from paying too much for the target in the event that sales don’t increase – the seller takes on the performance risk.

While structures vary greatly, in the plain vanilla version the target is purchased for a base price with the possibility of an additional earn-out. Earn-outs need to be well defined to ensure that both parties know when the payouts are triggered.

While in theory earn-outs are quite simple, these structures can make it difficult for unprepared entrepreneurs to get their fair payouts. One of my mentors, Jed Katz, has lots of his experience as both an operator and investor. During his time as an entrepreneur, he learned a few tactics that can help entrepreneurs increase their chances of maximizing their payouts. Here they are – the top four ways to avoid being burned by an earn-out:

#1 Base The Earn-Out On Simple Metrics

Earn-outs are most effective when the size of the payout is determined based upon one or two simple variables.

For example, higher revenue might lead to a higher payout to the shareholders of the acquired company.

In contrast, imagine an earn-out based upon price changes, customer acquisition cost and customer retention. To complicate matters, these variables might be woven together in an arbitrary equation that provides each metric with a weighting. In pursuit of maximizing the payout, management might focus on trying to optimize too many variables in the business, potentially resulting both in management not focusing on what matters most to the buyer and making it difficult for management to maximize their payouts.

Simplicity provides incentive alignment, clear objectives and less room for argument when it comes time to sign the check.

#2 Base The Earn-Out On Metrics You Can Control

The metric used to determine the size of the earn-out can vary – it’s negotiable. It could be a financial metrics (e.g., revenue, gross profit, EBITDA, etc.) or an operating metric (e.g., page-views, customers, etc.).

Entrepreneurs need to be sure that the selected metric is one that they can directly influence after the acquisition. For companies that are acquired for their cash flows (probably EBIT in this case) it’s important to base the size of the earn-out on a top line metric, such as revenue. There is good reason for this – the expenses allocated to the target might be very different once the target is integrated into the acquirer. Transfer pricing, overhead expense allocation and new accounting methodologies may drastically alter bottom line figures. As a division of the acquirer, the company’s EBITDA margin might be half of what it was before the acquisition – making it difficult for a management team to meet EBITDA growth targets.

This same logic applies to companies that are acquired before they are generating revenue. If a company is acquired because it generates lots of page-views, but no revenue, management should be wary to base an earn-out on revenue. If these entrepreneurs find themselves stuck using a poor monetization solution (that is mandated by the buyer), the revenue targets may not be in their control. In a case like this, management might only be in direct control over the number of page-views and therefore that’s the target metric that payouts should be based upon.

#3 Ensure Access To Sufficient Resources

Imagine it’s the day after you inked the sale of your company. Much of your pay-out is based upon meeting revenue targets in the coming quarters, but you’re confident that you’ll meet the revenue targets – managing this business is as easy as turning a crank at this point. You’re on cloud nine. That is, until you check your voicemail.

The second message is from the CEO of the buying company, your new boss. He notifies you that your marketing budget has just been cut in half as part of a cost cutting exercise. You know that it is now impossible to meet the revenue growth targets outlined in the earn-out – you’re not going to be able to maximize your pay-out. You just sold your company at a discount.

Scary scenario? You bet. Here’s another.

You are two months into the agreed upon one year employment at the buyer’s company. You have been instrumental in ensuring that your company, now a division of the mother-ship, is hitting its numbers. With close monitoring, you’re confident you’ll get the rest of your payout.

After getting settled into your office for the day you head over to the CEO’s surprise strategy meeting, where he introduces a new product line that he feels you would be perfect to run (since you’re the only person in the company that has built anything in that sector). Aware of your commitment to your division he asks you to split your time – allocating 50% of your attention to the new product line. You leave the meeting trying to find a way to reposition yourself, as you’re worried that your division won’t perform enough to meet the earn-out benchmarks without your full attention.

While it’s impossible to layout all of the details around the resources (staff, capital and your own time) you’ll need when you enter into an earn-out, you should try to obtain agreement from the buyer about your resource availability and you should have your lawyers bake in some language that can protect you.

You should also try to create a formal mechanism for increasing your resources as needed. If market dynamics change, market rates for key resources change or unique opportunities present themselves, you need to be able to take advantage of those changes. Incentives should be aligned; it’s bad for everyone if the company stifles your business’ growth just to minimize your earn-out. Having a pre-defined process for making these adjustments can help along the way. One approach is to have a formal quarterly review of your resource allocation that includes all of the appropriate people.

#4 Keep The Earn-Out Period Short

It’s important for entrepreneurs to negotiate hard to limit the length of time under which the earn-out metrics are evaluated. There are two key reasons for this: external and internal changes.

First, exogenous factors can limit an entrepreneur’s ability to maximize their payout. If the economy falls into a recession during the earn-out, revenue targets might not be as viable. The longer the earn-out period, the more risk the entrepreneur is taking.

Second, as more time passes the odds of the buyer’s strategy changing increase. While leveraging your company may have been a strategic imperative when it was acquired, market dynamics may dictate a different strategy post-acquisition. Or, perhaps, a new management team was brought into run your acquirer. Either of these factors (and many others) could lead to a change in priorities which could leave your business last in line to receive capital, support or other mission-critical resources.

In sum, it is advantageous for entrepreneurs to minimize the length of the earn-out (so long as they have sufficient time to meet their earn-out benchmarks).

This following column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.

The average company exiting through a public offering is more mature than a company that exits through an acquisition, at least since 2000.

There is good reason for this extra maturation. Public investors are often seeking to buy shares in companies that will continue to operate independently long into the future. In contrast, corporate acquirers may buy companies when they are very young before the company has demonstrated its ability to sustain itself. There are a variety of reasons why a company might be bought without demonstrating financial sustainability; a fledgling company might be acquired for its assets (technology, customer, contracts or management) or it may be acquired as a defensive maneuver – to eliminate the opportunity for the company to become a long-term threat.

It could also be argued that Sarbanes-Oxley legislation, which requires additional internal process documentation and oversight by public companies traded on U.S. exchanges, has delayed public offerings. Companies must ensure they will be compliant with Sarbanes-Oxley regulations, and that they can afford to pay the associated costs, before they can issue public stock for the first time.

From the period of 1996 to 2008, the average company that IPO’d was 8 months older than the average company to be acquired. It’s worth noting that this pattern didn’t hold true during the Internet boom. In the period of 1996 to 1999, the average software company making its initial public offering was five months younger than the average company being acquired (according to Dow Jones Venture One data).

The general trend of IPOs taking longer to realize than acquisition also puts pressure on investors to push for larger exit values. VCs are judged by their investors based upon a number of metrics, one of which is call the Internal Rate of Return (IRR). An IRR is an accurate way of measuring the average annual rate of return on invested capital adjusted for the timing of cash flows. A simple relationship that comes from this math is the fact that longer times to exit reduce the effective annual return. Returning 200% of invested dollars in 1 year implies a higher average annual increase in value than returning 200% of invested dollars in 10 years. As a result, the delay in exit time drives VCs to require higher exit values to adjust for the delay. While in theory the increase in value can be justified by the company’s ability to expand its operations and increase revenues over that period, every exit is ultimately a negotiation and this delay drives VCs to target higher exit values.

This following column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.  

I recently attended a networking event with Jeff Stewart, one of the founders of both Mimeo and Monitor110 (two of our DFJ Gotham portfolio companies). Over the course of the event, I heard Jeff offer some advice to a group of younger entrepreneurs. I found one of his points to be very compelling and thought I would share it here.

Jeff argued that trying to raise money from venture capitalists early in the life of the company is a great idea. While he thought securing capital was important, however, the money wasn’t the reason he encouraged the young entrepreneurs to engage in the VC fundraising process. The benefits he cited were as follows:

• Enhance the plan: By pitching to VCs and getting feedback, an entrepreneur receives valuable feedback that helps him refine his business model, marketing strategy and other aspects of his plan.
• Make connections: While VCs don’t make introductions for every entrepreneur that they meet, Jeff argued that the entrepreneurs would likely be connected to important customers, partners and future members of their teams through the investment community.
• Learn how to pitch the company: By pitching early in the life of the company and pitching often, entrepreneurs learn how to sell their companies. From his perspective, selling in this way is not only important in fundraising, but is also critical for making key hires, securing partnerships and literally selling the company when the right buyer comes knocking.

VCs understand that the fundraising process is time consuming, taking entrepreneurs away from building the company.  Creating documents for investors can be one of the most time-consuming parts of the process.  While not all of the documents are likely to assist in operations, some of the materials can and should be created with operational purposes in mind to make more use of these efforts.

Here are five ways to make the fundraising process more useful to your operation:

1. Create projections in a manner that makes them easy to use for future planning and budgeting,
2. Design your uses of capital raised analysis to play into your short term budgets by making it sufficiently detailed,
3. Leverage the addressable market analysis to identify the most attractive target customer segments,
4. Revisit your competitive landscape when preparing investor materials to look for best practices and opportunities to enhance your model, and
5. Generate a sales pipelines document that can be leveraged by your sales department going forward (you’ll probably need an operational version of this document to share with your board in the future).

Fundraising can be a tedious process – try to get as much operational value out of it as possible.

This column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. In addition to his column, Mark is active in the venture community as an entrepreneur, advisor and venture capitalist. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.