The Importance of Reporting

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Cross posted from MayorBrad.com:

Reporting is one of the most important tools for any management team to effectively run their business.  But unfortunately, its a skill that most entrepreneurs lack.  This is the result of many entrepreneurs never working in an organization that stressed the importance of reporting and accountability.  It is also the result of most entrepreneurs viewing reports as a big time suck instead of a valuable tool.  Thus, entrepreneurs tend to avoid developing a consistent cadence of reporting with their teams, investors, and/or advisors.

Here’s why reporting can make all of us better:

(1) It demonstrates an understanding of the metrics that drive your business and are critical to keeping the team focused on what is important

(2) Holds everyone accountable for their performance

(3) Sets a culture of openess and transparency

With that said, our portfolio company LeagueApps delivers a solid monthly report on the 5th of every month.    We like their format:

  • Health of businesss
  • Key Headlines
  • Summary of Performance Metrics
  • Financials
  • Investment / Capital Requirements
  • Business Highlights
  • Product Update
  • Technology Update
  • Personnel Update
  • Marketing, Press and Media Coverage
  • Areas that Need Improvement
  • Personal Updates on team, family, etc (ie founder has new baby)

We hope this helps.

The Importance of Reporting

Convertible Note: An Entrepreneurs’ Perspective

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Rohit Vashisht is Founder and CEO of Sverve, a social consumer activation platform and social influencer network. He shares some valuable insights and his experience with raising money on convertible notes. This article originally appeared on his blog and on Medium.  You can follow Sverve on Twitter.

If you are raising money for your startup, then most likely you would have heard of convertible notes. Your lawyer would say its cost-effective, other entrepreneurs would say it saves you the tricky valuation discussion and investors might like it for its simplicity. We heard all these good things and wrote a convertible note for our first financing. However, we realized that almost all the benefits can quickly vanish depending on your deal. So here are a few things to keep in mind.

You will save money [really?]  — Lawyers will tell you that a convertible note will cost half of the priced [equity] round. However, this difference can narrow significantly if you don’t have a standard deal. The lawyer fee can rack up quickly with back and forth on terms and documentation. If you know your investors aren’t atypical startup angel investors and are most likely to negotiate hard on cap, discount and interest, then you should seriously consider doing an equity round right out of the gate.

Let’s not talk valuation, [but?]  — I believe it’s a myth that a convertible note kicks the can down the road on valuation. Although standard convertible note terms include discount, most end up having a cap on conversion. Investors like to know [at least] how much they own for their investment in the company. A cap is nothing but valuation with a different name. A $2M cap on a note is really $2M valuation of your company at the time of financing.

Time to convert, [how?]  — The idea of a convertible note is for it to convert into equity at some time [duh!]. The most likely scenario for conversion is at the time of priced [equity] round. Brace up for some ugly negotiations with your new investors on how a convertible note is converted. While your lawyer would suggest converting the note “into” the round, which means it is converted along with the new money [post- money], your new investors would want you to convert it pre-money to avoid dilution due to convert. This can significantly impact founders’ dilution depending upon the difference between the cap on the note and the valuation for the new round. The more notes you have, the worse the situation.

Do worry about the interest, [seriously?]  — Most convertible notes accumulate interest in the range of 6–12%. Although it might look benign and lawyers might advise that it’s insignificant, you should pay attention to it incase you get lower cap on the note. Depending on the cap [or valuation] on the note, the interest itself can be significant at the time of conversion. For example, a $250K note at 8% interest compounded monthly at $2M cap and converted after 12 months will take away 1.35% of your company in interest only. Most likely that interest comes out of founders’ pocket.

In a nutshell, if you aren’t getting a standard deal, then question really hard if you want to go for a convertible note. Entrepreneurs who are raising money for the first time can fall for a convertible note for its perceived simplicity and cost-effectiveness. Yours truly is one of them. Remember, devil is in the details!

Convertible Note: An Entrepreneurs’ Perspective

Is venture capital under attack?

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Cross posted from mayorbrad.com:

I am an early stage technology investor.   It’s what I love and I wouldn’t want to do anything else.

And with the job title of VC comes a few primary functions:

(1) Be great at finding, cultivating, and investing in amazing entreprepreneurs building disruptive companies.

(2) Successfully raise money for our funds from high net worth individuals/angel investors, family offices and institutional investors.

(3) Build profitable companies by providing advice, mentorship and access to our network.

(4) Have exits and distribute money to investors.

While that sounds pretty straightforward, it’s not.  It’s really, really hard and very few firms build enduring brands that survive multiple boom and bust cycles.   At Scout, our goal is to build a great firm that lasts.

Recently, there have been a lot of discussions about what value VCs really bring?   The discussions focus on two key areas: (1) Performance and (2) Access to Deals.

Unfortunately or perhaps fortunately, venture capital as an asset class is under attack. Organizations like the Kauffman Foundation are questioning the returns and structure of the industry arguing that most fund managers don’t beat the public markets and still charge management fees and carry.   In Kauffman’s May 2012 report “WE HAVE MET THE ENEMY… AND HE IS US” they state that they believe smaller funds (less than $400M) with partners that consistently beat the public markets and invest 5% of their own money are the right firms to back.

Furthermore, the very closed nature of venture capital is changing drastically with the emergence and expansion of accelerators, incubators, co-working spaces and online platforms.  Historically, VCs differentiated themselves through their “proprietary” access to the best deals.   But in recent years, entrepreneurs are experiencing an unparalleled level of access to potential investors through online platforms like SeedInvest and Angelist.   Additionally, accelerators and incubators have become masters of the overly produced “Demo Day” where I actually saw a pitch with dancers in silver sequenced dresses. Regardless, entrepreneurs and investors have many more ways to more effectively connect in person and online.   Again, another argument that VCs no longer have their unique closed access to deals.

While this might seem like a good thing, I’d argue that the more experienced, smart money is and will always be more valuable than money from some finance guy that thinks he is going to write 5 checks and find the next Google.    Often these investors have no idea how to value a start-up, how to structure a deal (equity or convertible debt) and more importantly they have no experience building early stage companies.  They simply lack the skill set and required experience.

The people with that experience – VCs.

Now, I definitely think there are some amazing entrepreneurs that sell their companies and become valuable early stage investors, but they are the exception.   Most angel investors simply are not that sophisticated and can’t add the same value that Fred Wilson can add.   Fred is one of the most knowledgeable and successful VCs and he spends a ton of time educating entrepreneurs and investors alike.    He can do that because of his years of experience as a VC.

Almost everyone knows that people are the key to making early stage companies great.  A common mistake that kills early stage ventures is hiring the wrong key people.   If you need a CTO, then obviously hire someone with technology and management experience.   If you need a great VP of Sales, then hire someone with a track record of building a sales team and growing revenue.

This seems obvious, right?

Then why wouldn’t the same hold true when entrepreneurs need money and guidance to build their company.   If you are looking for an investor – it has to be more than money.    You want someone with the experience and track record of building successful companies.  VCs have a tremendous amount of experience in building teams, building products, scaling businesses, securing subsequent rounds of financing, access to potential customers, partners and potential acquirers.

I am definitely not saying that I love VCs, because their are plenty of assholes in VC.   But if you are fortunate enough to attract a VC with a good reputation and track record – you should figure out how to get them involved with your company.

We can make a difference.

Is venture capital under attack?